Incodo Limited v Kop-Coat New Zealand Limited [2017] NZHC 2737 (8 November 2017)

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BETWEEN	INCODO LIMITED Plaintiff
AND	KOP-COAT NEW ZEALAND LIMITED First Defendant KOP-COAT INC Second Defendant

Hearing:	29, 30, 31 May and 1, 2, 12, 13 and 14 June 2017 and 3 August 2017 (Conference)
Appearances:	D M F Fraundorfer, M B B Beech and J M E Easton for Plaintiff A S Olney and O E Jaques for First and Second Defendants
_Judgment:	_{8 November 2017}

This judgment was delivered by Justice Fogarty on 8 November 2017 at 4.00 p.m., pursuant to

Introduction ..........................................................................................................[1] The issues [5] The narrative of dealings between the plaintiff and the defendant .................[9] Contract or no contract? ...................................................................................[47] Authority to conclude the contract [57] Authority to bind Kop-Coat NZ [63]

Is Kop-Coat Inc bound by the May terms? .....................................................[87] Incodo and Kop-Coat NZ were not ad idem [103] Conditions precedent not fulfilled [109] Conclusion on formation of contract [114] The terms of the contract — Contractual Mistakes Act 1977...................... [115] Repudiation.......................................................................................................[121] Remedy — damages? [124]

Was Incodo induced to enter the contract by any pre-contractual misrepresentations? ....................................................................................[145]

Fair Trading Act 1986 ......................................................................................[156] Fall-back position — estoppel .........................................................................[162] Causes of Action: Summary and conclusions ................................................[165] First cause of action: Breach of contract [166] Second cause of action: Breach of s 9 of Fair Trading Act 1986 [168]

Remedies Act 1979 [169] Estoppel [170] Introduction to the damages claim .................................................................[171] Loss of a chance analysis .................................................................................[172] The principles applicable for assessing the value of the loss of a chance ....[173] Expert evidence of the lost chance ..................................................................[180]

Boron treatment ............................................................................................[182]

Overall size of the market [187] Could the rival’s market share be taken? [225] Assessing the chances [249] Conclusions on my approach and assessment of the chance [257] Conclusion.........................................................................................................[271]

[1] Incodo Ltd (Incodo) went to trial on its Third Amended Statement of Claim, dated 7 November 2016. It alleges three causes of action against Kop-Coat NZ Ltd (Kop-Coat NZ) and Kop-Coat Inc, together referred to as Kop-Coat, for:

[2] The defendants deny liability, saying that the document relied upon by the plaintiff was manifestly a draft; there was no contract.

[3] Incodo seeks damages representing an assessment of the net present value of lost profits over either three or six years following the alleged May contract.

[4] After the close of pleadings, the plaintiff applied for leave to file a fourth amended statement of claim. It differs from the third amended statement of claim, alleging equitable estoppel binds Kop-Coat to the assurance of a business relationship for a six-year period. Leave to rely on the fourth amended statement of claim was not pursued. In any event, the defendants contend the plaintiffs suffered no loss as the disputed contract was unprofitable. That position is unchanged regardless of the basis upon which damages are claimed.

[5] The first key issue for determination is whether a valid contract was formed. This issue turns upon whether Mr Scott, the senior employee of Kop-Coat NZ, had authority to enter into a contract on 22 May. Secondly, if there were a contract, the issue is whether the contract was between Incodo and Kop-Coat NZ alone, or was Kop-Coat Inc also a party?

[6] The third issue is whether Kop-Coat NZ and Kop-Coat Inc repudiated the agreement.

[7] The fourth issue arises if Kop-Coat NZ and/or Kop-Coat Inc are found to have repudiated a binding contract with the plaintiff. It is whether the plaintiff suffered loss by losing a chance to make a profit.

[8] As the reader will find, some of the other pleadings, such as breach of the Fair Trading Act 1986, alleged misrepresentations and the pleading by the defendants that the document was manifestly a draft, fall away or are subsumed against the findings under the above four issues.

[9] Kop-Coat Inc is a subsidiary entity of RPM International Inc (RPM). RPM is an American company that, through its various subsidiaries, manufactures and markets high-performance coatings, sealants and specialty chemicals. RPM is a Fortune 500 company in the United States. Kop-Coat Inc is part of RPM’s specialty products group. Kop-Coat Inc manufactures and markets protective solutions for processed timber and manufactured wood through various subsidiaries such as Kop- Coat NZ.

[10] Kop-Coat NZ, the first defendant, has had an annual turnover of between NZ$20 and $25 million and approximately 23 employees nationwide. Its main business activities have been manufacturing and distributing chemicals. Through its subsidiary, Agpro NZ Ltd, for example, it has manufactured and distributed herbicides and other chemicals to the farming, forestry and horticultural industries. It has done business in Australia as well.

[11] Tru-Core is a patented wood treatment process, developed by Kop-Coat Inc in 2003 as an alternative to available treatment processes to preserve wood by an injection of Boron. Presently in New Zealand Tru-Core is only applied to timber at the production stage. The key advantages of Tru-Core are:

(a) It is applied with water and its formulation does not contain volatile chemicals;

(d) The method of application is by spraying, rather than brushing, the product onto the wood.

[12] In Australia, the Tru-Core process has been licensed as a mobile system called “Boron Solutions”. The Boron Solutions programme was a field spray programme for all wooden parts of the structure of a newly-built frame of a home. It was used for a number of years and discontinued in January 2017 to develop a new trademark.

[13] The senior executive of Kop-Coat NZ at the material times was Mr Cameron Scott, who had been employed by the company for about 18 years, until late 2015. His employment with Kop-Coat NZ ended following the troubles which have led to this litigation.

[14] Mr Timothy James was a subordinate to Mr Scott. He was engaged as a contractor for Kop-Coat NZ in December 2014 with the role of sales and service specialist. This role involved managing the following Kop-Coat NZ business venture programmes:

[15] Mr James was charged with developing a strategic and business plan for each. The first thing he was asked to do was the preparation of a strategic plan for the field spray unit. Throughout January, February and March of 2015 he looked for potential licensees for New Zealand. He was looking for people who were active in remediating leaky homes or the treatment and spray area, and who were suitable to run the Tru-Core programme.

[16] Mr James’ evidence was that Kop-Coat NZ were intentionally keeping a low profile rather than openly advertising for licensees. They were taking a strategic approach as to who they would ultimately engage. In Mr James’ mind, the first

licensee was the most important to get right as it would set the standard for those that followed. Following his inquiries, Mr James had around 20 parties expressing interest in the programme. He found Mr Paul Probett, a director of Incodo, in early February 2015.

[17] Incodo is a property inspection and building surveying business. Mr Probett is a qualified building forensic specialist and building supervisor with over 12 years’ experience as a weathertight home assessor. He has an understanding of the leaky- building market. Mr Probett confirmed that Mr James approached Incodo to establish if they had any interest in becoming a licensee of Kop-Coat’s field spray programme in New Zealand. This led to meetings and discussions between the two men. Then Mr Probett was introduced to Kop-Coat NZ’s general manager, Mr Scott.

[18] By the start of April 2015, the parties were negotiating. By mid-May 2015, Kop-Coat NZ instructed Russell McVeagh, solicitors, to draft a contract. Russell McVeagh obtained a copy of Kop-Coat’s Boron Solutions agreement used in Australia and adapted the terms to apply to the boron-based Tru-Core product in New Zealand.

[19] Coming towards the end of May, Russell McVeagh and Mr Scott, assisted by Ms Alison Armstrong (from Kop-Coat NZ), were working with a draft contract between Incodo, Kop-Coat NZ and Kop-Coat Inc.

[20] It is of some importance to keep in mind that the business year of Kop-Coat NZ was the end of May. Moreover, Mr Scott was under instruction as the chief executive in New Zealand to reach annual sales targets by the end of May. He was falling short. It follows he had an incentive to enter into this transaction by the end of May, enabling him to book some of the value of the transaction as a sale. The 22

May 2015 agreement provided for a “Program Set Up Fee” of $40,000. Half was payable at commencement, with the remaining $20,000 paid by even monthly payments over the first 12 months.

Manager) were all very keen to complete the contract. If completed, Kop-Coat NZ would enter the market for remediation of damaged wood associated with leaky building failure through Incodo, using Kop-Coat’s Tru-Core product and the spray method of application.

[22] The solicitor at Russell McVeagh handling final preparation of the contract was Ms Hannah Bain. The email trail is important. Kop-Coat Inc’s representative in Australia, Mr Robert Wong, provided the Australian Boron Solutions agreement (dated 3 August 2009) to Mr Scott on 13 May 2015. On the same day, Mr Scott passed it to his assistant, Ms Armstrong, and on the same day Ms Bain made contact with Mr Scott. On 14 May, Ms Armstrong forwarded a draft licence agreement to Ms Bain for perusal and analysis. Five days later, Ms Bain sent to Incodo both a clean and marked-up draft, with suggested changes to the Incodo licence agreement, linking by email a Russell McVeagh partner who had oversight of her work. On 20

May this draft was forwarded on by Mr Scott to Ms Armstrong. Between 19 May and 22 May, Ms Bain was in dialogue with Mr Scott and others on taxation issues, getting input from other experts within Russell McVeagh. This dialogue continued through to 21 May. This redraft was also forwarded to the United States, to Mr Hans Ward, by Ms Bain on 22 May.

[23] On 22 May, Mr Ward joined the process for the first time. He is a director of the first defendant, Kop-Coat NZ, and a senior executive of its parent, Kop-Coat Inc. Mr Ward also has management or directorial roles in several other Kop-Coat Inc subsidiaries.

[24] It was Mr Ward’s evidence-in-chief that he first learnt of Incodo in May; that he received a draft contract a day or so before 22 May; that he set up a conference call with Ms Armstrong and Mr Scott to tell them not to proceed. He was unhappy that they had stepped beyond their authority and wasted company money on contract development. I note that this is inconsistent with his first exchange of emails with Ms Bain, of Russell McVeagh, described in the next paragraph.

08:43 am Ms Bain sent to Mr Ward her law firm’s draft marked-up agreement, which

drew a response from Mr Ward less than 10 minutes later, saying he needed to discuss with Mr Scott first. Mr Ward noted:

The inputs and prices may be incorrect as they apply to a different aussie program.

[27] In New Zealand, on the afternoon of 22 May, there was a Kop-Coat telephone conference. Unfortunately, naturally, it was not recorded to the same detail as is available from perusal of email correspondence. This was a tele-conference between Mr Ward, Mr Scott and Ms Armstrong. Following this conference Mr Scott took the proposed agreement (as amended with the last changes identified at this conference inserted by Ms Armstrong) to Mr Probett for execution. Neither Mr Scott nor Ms Armstrong treated the papers as merely a draft. On the contrary, they believed it was a complete set of terms ready for execution. There is no evidence that they were aware of formula errors or any errors for that matter.

[28] Having seen and heard the witnesses — Mr Ward, Mr Scott and Ms Armstrong — I cannot accept that Mr Scott and Ms Armstrong would deliberately flout Mr Ward’s authority over them, let alone be party to entering into a contract binding Kop-Coat NZ and ultimately its parent company contrary to the instructions of Mr Ward. On the probabilities, what happened was that Mr Ward may have been surprised by the proposed contract but was reacting positively to undertake a review of the detail of the contract prior to execution. That is confirmed by his email I am

about to refer to,¹which was sent by him from the United States after the agreement

[29] The draft was so drawn to be signed by a director of Kop-Coat NZ and likewise, separately, by Kop-Coat Inc. Mr Scott was not a director. Yet, he signed on behalf of Kop-Coat NZ and he said he told Mr Probett that the contract would be

[30] Mr Ward did not know at that time that this first draft of the licence agreement was signed. Much later in the day, after the signing, nearly midnight New Zealand time, Mr Ward sent an email to Ms Bain advising:

Cameron, Alison and I reviewed the changes needed to address the differences in the NZ program.

After you redraft based on their input to you, then please send me the final draft.

[31] It is apparent from the emphasised passages that Mr Ward thought he was asking Ms Bain to do the “final” draft (or, at the least, near to). But, unbeknown to Mr Ward, Ms Armstrong had already done the redraft based on what she understood to be the final input that came from the telephone conference she and Mr Scott had with Mr Ward, earlier in the day.

[32] At around the same time as writing to Ms Bain (about five minutes later), Mr Ward sent an email to Mr Ron Clawson, copying it to Mr Scott, Ms Armstrong and Mr Wong. The email concerned the composition of the product to be deployed in New Zealand:

Can you Frankenstein a formula based on Bazooka and Sigma or Gamma as Tano donors. Also the Glycol needs to be checked and readjusted if needed. NZ will not use Zeta for start up, hence adjustments...

[33] This jargon was essentially one chemist, Mr Ward, talking to another chemist, Mr Clawson, as to the need to adapt the formula of the product to fit its intended use in New Zealand. It is not clear whether Mr Ward was intending this instruction to lead to further amendments of the licence.

[34] Within Russell McVeagh was a tax solicitor engaged by Ms Bain. His name is Mr Tim Stewart. It is clear that neither Ms Bain nor Mr Stewart, nor Mr Ward

appreciated that the agreement had been executed on 22 May 2015, following the conference between Mr Ward, Mr Scott and Ms Armstrong.

[35] After consulting with Mr Scott on 27 May, Mr Stewart decided that some current questions he had been assessing about non-resident withholding tax had fallen away.

[36] Then, on 28 May, six days after the agreement was signed, Mr Ward sent to Ms Armstrong, Mr Scott, Mr Wong and Ms Bain what he described as a “clean copy” of the licence agreement, advising:

[37] This email was acknowledged by Ms Bain, who said she was awaiting a revised version from Ms Armstrong. So, Ms Bain also obviously did not know the draft had been signed already. Mr Ward and Ms Bain continued some email contact relating to the technology’s patent and royalties. It is therefore also clear that neither Ms Armstrong nor Mr Scott had told Mr Ward about a signed agreement.

[38] On 3 June 2015, Ms Bain contacted Ms Armstrong by email inquiring about the clean copy of the licence agreement. Ms Armstrong replied that she was going to get back to Ms Bain, but was busy because Kop-Coat’s financial year ended on 31

[39] It was not until 23 June (almost one month later) that Ms Armstrong provided Ms Bain and Mr Ward with a redraft of the agreement, with the changes Mr Ward had requested. She also advised that the Probetts were going to use another company (a nominee), Red Timber Ltd, for the field spray programme, rather than Incodo. This led to further amendments by Russell McVeagh.

[40] On 1 and 2 July 2015, Ms Armstrong, Mr Ward, and Mr Scott were dealing with amendments. Ms Armstrong was also reporting to Mr Ward and Mr Scott that the Probetts were very keen to have the contract by Friday 3 July — they wanted to start “making money, money, money!”. On 2 July, Mr Ward gave precise instructions to Ms Armstrong (copying it to Mr Wong, among others) for the execution of the attached agreement, noting that a number of important errors had been identified. It concluded with instructions to scan the final signed agreement and send it to him by email when he would sign it, on behalf of Kop-Coat Inc.

[41] Fine-tuning of the licensing terms continued between Ms Armstrong, Mr Ward and Mr Scott through 1, 2 and 3 July, culminating with instructions from Mr Ward on 3 July. At no time did Mr Scott tell Mr Ward the earlier draft had been signed.

[42] This revised draft was taken on 3 July to Mr Paul Probett by Ms Armstrong. Ms Armstrong came with Ms Clair Coker (another Kop-Coat NZ employee) to meet with Mr Probett and his son. Ms Armstrong requested use of their computer to print the document. She made some last changes. She then took the printed document and said “Here is the new contract for you to sign.”

[43] Mr Probett responded by asking Ms Armstrong’s companion, Ms Coker, whether there was any provision in the signed agreement for a new contract. Neither Ms Armstrong nor Ms Coker said anything, however, let alone explained the changes. To Mr Probett, it seemed as though they expected Incodo to sign what appeared to him to be a new agreement, there and then. Mr Probett and his son informed Ms Armstrong and Ms Coker that they would look through it. Ms Armstrong and Ms Coker left the office without Incodo signing the document. It never has been signed.

[44] At the same meeting, the Kop-Coat representatives also delivered a draft operation manual which, upon inspection by the Probetts, appeared to be the Boron Solutions manual for use in Australia.

[45] Mr Paul Probett and his son took the request to sign this new draft badly. They thought Kop-Coat was reneging on the earlier signed agreement, which to them was a binding contract. The Probetts’ understanding of the 3 July version was set out on 11 July in a six-page memorandum entitled: “Kop-Coat Inc’s unilaterally proffered replacement contract”.

[46] In late July, Mr Ward came out to New Zealand and endeavoured to renegotiate a contract, but by this point it was a lost cause. The relationship between Incodo and both Kop-Coat NZ and Kop-Coat Inc ceased. Within Kop-Coat NZ, Mr James and Mr Scott lost their jobs, and Ms Armstrong resigned.

[47] Counsel for the first and second defendants submitted that the provisions in the 22 May document objectively point to a mutual intention of the parties that Kop- Coat Inc would be a party to any agreement reached. Therefore, it was argued, no binding contractual relationship would be created unless, and until, each party, particularly Kop-Coat Inc, had confirmed its assent by executing the agreement in the form envisaged by the document itself. The argument pointed out that the agreement as drawn provided for the manner of its execution, including setting out provision for witnessed signatures of two directors for each party. To that end, Incodo went to the trouble of observing that required form by sending two directors (Mr and Mrs Probett) from Tauranga to Rotorua to execute.

[48] Mr Scott presented the document as the contract and he and the Probetts intended the signing to create a contract. There is no dispute, of course, that the document was not executed on behalf of Kop-Coat Inc, and that Mr Scott was not a director of Kop-Coat NZ. As I found above,²Mr Scott signed the agreement on behalf of Kop-Coat NZ and told Incodo that he would circulate it to Kop-Coat Inc for their signature. That is, though there is no dispute that the 22 May document was not executed on behalf of Kop-Coat Inc, it was accompanied at the time by a

_{representation from Mr Scott that Kop-Coat Inc would sign in due course.
Further, it}

was Mr Scott’s evidence that sometimes he would sign contracts on behalf of Kop- Coat NZ. That was not questioned by the defendants.

[49] Counsel for the first and second defendants relied on the decision of Carruthers v Whitaker as holding that lack of due execution envisaged by the parties means no contract was concluded.³This was an appeal against a judgment of the High Court declaring specific performance by the vendor of an agreement for sale and purchase of a farm. When cited in oral argument, I pointed out to counsel the common law distinction between contracts for sale and purchase of land and commercial contracts. It is a distinction is drawn by Lord Green MR in Eccles v Bryant,⁴cited by Richmond J for the Court of Appeal in Carruthers.⁵In Eccles,

When you are dealing with contracts for the sale of land it is of greatest importance to the vendor that he should have a document signed by the purchaser, and to the purchaser that he should have a document signed by the vendor. It is of the greatest importance there should be no dispute whether a contract had or had not been made and that there should be no dispute as to the terms of it.

[50] This passage reinforces in my mind the importance of drawing a distinction between recognition of the validity of contracts for the sale and purchase of land and recognition of the validity of commercial contracts.

[51] I invited counsel for Kop-Coat to provide me with authority where their argument is supported in a commercial context. No other authorities were cited.

[52] On 22 May the plaintiffs in this case completed all that was required of them to execute the proffered agreement. Objectively they intended to be bound by that agreement. Likewise, Mr Probett intended Kop-Coat NZ to be bound by the assurance that its parent company would in due course execute the agreement.

[53] To my mind this is a case in which the parties during negotiation had already substantially worked out a future contractual relationship. The proffered terms were

executed quickly as both parties wanted a formal contract as soon as possible. The

22 May contract was a representation of their already-expressed intentions to be bound. I do not infer simply from the absence of signatures from two directors of Kop-Coat Inc that the contractual intention of Kop-Coat Inc was not there.

[54] The agreement had been drafted by the solicitors, who clearly expected the contract would be executed by a director of Kop-Coat NZ and likewise Kop-Coat Inc. The law does not require execution of such a contract in this manner. Contrary to the solicitors’ expectation, there was an exigency going the other way. Kop- Coat’s New Zealand office was under pressure to close deals before the end of May. There was also a history of Mr Scott binding the New Zealand company to contracts in the absence of directorial execution. The drafter’s expectations reflected in the draft agreement is therefore not a decisive fact in determining whether the contract is binding.

[55] Rather, the contextual evidence suggests executing the contract was a solemnization of their agreement. After it was signed, they continued to work out the application of what was objectively a formed agreement — settling details including the formula, logos, websites and brochures. This is common commercial practice, when executives are engaged with giving effect to a new mutual commercial relationship which has been reduced to writing. These actions are consistent with an existing agreement and support the Court finding the persons in New Zealand were, objectively, acting in consequence of what they thought was a contract between them.

[56] This question of whether there was formation of contract turns ultimately on whether Mr Scott had the authority to sign on behalf of the defendant companies or, failing that, whether the plaintiff was entitled to rely on his apparent authority to do so.

[57] The second defence argument was that there was no authority for Mr Scott to sign. Mr Scott had been employed by Kop-Coat NZ for some 18 years and was effectively its New Zealand manager. He was not a director. On the other hand, the

evidence was that Mr Scott thought that his last telephone conference with Mr Ward and Ms Armstrong had resolved the remaining issues in the contract and that he had authority, in the circumstances, to get it executed. As already noted, Mr Scott gave evidence that from time to time, although not internally authorised to sign contracts, he did sign contracts on behalf of Kop-Coat NZ — and such contracts were accepted by Kop-Coat. It is important to keep in mind 22 May was about a week before the end of Kop-Coat’s financial year. There was pressure from the United States of America on the New Zealand branch to book the transaction. Mr Ward also acknowledged this in his evidence.

[58] No evidence was led by the defendants that Mr Scott had been in the past censured or disciplined for signing on behalf of Kop-Coat.

[59] It is also a relevant contextual point to keep in mind that in the ensuing events from 22 May, June and into July, when Kop-Coat Inc and Kop-Coat NZ were trying to rescue the contract. There was never any disavowal of the contract by Kop-Coat Inc or Kop-Coat NZ on the ground that Mr Scott had no authority to have signed on behalf of Kop-Coat NZ. I am not suggesting that creates any recognisable estoppel. But it does inform the question and answer as to whether Mr Scott had authority to sign on behalf of the First Defendant. A further and important part of the context, as I will repeat several times in the judgment, is that this was a relationship being pursued by Kop-Coat Inc and Kop-Coat NZ. Kop-Coat approached Incodo, not the other way around.

[60] Much of the defendants’ argument was based on the lack of actual authority of Mr Scott and the internal superiority of Mr Ward over Mr Scott. I do not agree with this formulation of the plaintiff’s case by the defendant:

Ultimately, the plaintiff’s case in respect of Mr Scott’s actual authority to sign on behalf of Kop-Coat NZ is that Mr Ward, is the directing mind of Kop-Coat NZ, knew of the May document and approved it being signed on

[61] Counsel for the plaintiff did not close on that basis. Rather, they relied on three propositions:

	(a)	The plaintiff was entitled to rely on the contract being formed by virtue of the operation of s 18 of the Companies Act 1993, through Mr
		Scott;
	(b)	Through the principles of agency, Mr Scott had express authority or
		ostensible authority to contract on behalf of both defendants, and that agency was ratified by the defendants; and
	(c)	Each defendant accepted the May contract through its conduct or by ratification.
[62]	The	defendants in their opening submissions raised the doctrine of

[63] The first issue is whether or not Mr Scott had ostensible authority to sign on behalf of Kop-Coat NZ. The submission by the defendants is that he did not, because ostensible authority depends upon a prior representation by the principal (in this case, the Board of Kop-Coat NZ) of the authority to sign.

[65] Ostensible authority cannot be confined in this way. Ostensible authority needs to be examined from the perspective of the persons dealing with the company. Essentially my view is that Mr Scott’s prominent position in Kop-Coat NZ established his ostensible authority upon which Incodo via its directors and particularly Mr Probett were entitled to rely. Mr Scott’s 18 years as the senior employee of the New Zealand branch of Kop-Coat formed part of a holding out by Kop-Coat Inc, and Kop-Coat NZ, that he was entitled to enter into agreements on behalf of Kop-Coat NZ. Mr Scott had occasionally signed contracts on behalf of Kop-Coat NZ and had been backed up by its directors. In the last week of the

financial year, immediately after conferring with Mr Ward, I find in the circumstances he thought he had the authority to sign.

[66] As the manager of Kop-Coat NZ, Mr Scott operated a company with a turnover in the order of $20 million per annum. He had the confidence of the parent company, Kop-Coat Inc. There was no disputing the context that there was pressure on the executives in New Zealand (coming from other persons in Kop-Coat Inc) to close deals which could be booked as sales before the end of the financial year on 31

[67] As we have seen from the emails sent by Mr Ward on the night of 22 May, he was talking in terms of final changes. The document had been negotiated for some time and as I have already noted, at no time in the ensuing negotiations trying to rescue the deal, did Kop-Coat Inc or its parent company ever suggest that Mr Scott was a rogue employee. It was not until the business relationship was well and truly at an end that it was asserted that Mr Scott had no actual authority to sign.

[68] It is a very important fact in the litigation that the agreement had been executed before Mr Ward’s email was sent on 22 May at 11.17 pm New Zealand time to Ms Bain and copied to Mr Scott and Ms Armstrong. It was on the subject of suggested changes to the Incodo licence agreement and reported to Ms Bain that there had been a meeting reviewing the changes and asking her to redraft the agreement based on their input.

[69] Had the agreement not been signed, there would have been no basis after Mr Ward’s email for Mr Scott and Ms Armstrong to believe that they had authority to go ahead and get the agreement executed.

[70] In my view it is a fact supporting their ostensible authority that Ms Armstrong and Mr Scott from that point on did not tell Mr Ward that they had actually got the agreement signed the previous day New Zealand time. Plainly at the very least they must have been severely embarrassed. Their reluctance to tell Mr Ward in itself indicates that in the normal course of business they would never act contrary to their superior, Mr Ward.

[71] Counsel for the plaintiffs correctly relied on the presumption of regularity couched in s 18 of the Companies Act 1993, which provides:

(1) A company or a guarantor of an obligation of a company may not assert against a person dealing with the company or with a person who has acquired property, rights, or interests from the company that—

(ii) Does not have authority to exercise a power which a director, employee, or agent of a company carrying on business of the kind carried on by the company customarily has authority to exercise:

(d) A person held out by the company as a director, employee, or agent of the company with authority to exercise a power which a director, employee, or agent of a company carrying on business of the kind carried on by the company does not customarily have authority to exercise, does not have authority to exercise that power:

(e) A document issued on behalf of a company by a director, employee, or agent of the company with actual or usual authority to issue the document is not valid or not genuine—

unless the person has, or ought to have, by virtue of his or her position with or relationship to the company, knowledge of the matters referred to in any of paragraphs (a), (b), (c), (d), or (e), as the case may be, of this subsection.

(2) Subsection (1) of this section applies even though a person of the kind referred to in paragraphs (b) to (e) of that subsection acts fraudulently or forges a document that appears to have been signed on behalf of the company, unless the person dealing with the company or with a person who has acquired property, rights, or interests from the company has actual knowledge of the fraud or forgery.

[72] Counsel for the plaintiff submitted that this section affirmed and extends the common law principles known as the “indoor management rule” or the rule in Turquand’s case.⁸They submitted that the purpose of the section is to provide

protection to those dealing with a company in that it restricts the circumstances in which a company, or guarantor of an obligation of the company, can assert that the company, or a person the company held out as acting on its behalf, lacked authority to enter into the relevant transaction. It was submitted that the justification behind the rule is that a person dealing with a company is entitled to assume that the company’s internal requirements have been complied with and that the company’s officers are acting lawfully.

[73] Counsel for the defendants relied on the Court of Appeal decision in Savill v Chase Holdings,⁹as recently applied by French J in Levin Meats Ltd v Perfect Packaging Ltd.¹⁰

[74] The setting of Savill v Chase Holdings was the sale and purchase of real property in Christchurch through the sale of shares of a holding company, Chase Holdings (Wellington) Ltd.¹¹Prior to any contract for sale it was found as a fact that it was made clear to the purchasers, Chase Holdings, that Mr Walker rather than Mr Savage was in charge of the Christchurch properties. Given that finding of fact the argument that Mr Savage had ostensible authority was obviously hopeless. It is important to read ostensible authority case decisions in the light of the subject facts. Reliance was however placed on the following passage from McMullin J’s judgment in that case:¹²

It is of the essence of this ground of appeal that Chase Corporation be shown to have represented or permitted it to be represented that Mr Savage had authority to act on its behalf or that Chase Holdings had that authority. A line of authorities at the highest level makes that clear.

[75] This principle was discussed in Levin Meats Ltd v Perfect Packaging Ltd.¹³

In that case, the respondent had sent Levin Meats Ltd a sale agreement for the purchase of some machinery, marked for the attention of Mr Phil Grey. Delivery of the contract followed extensive negotiations between Perfect Packaging Ltd and Mr

⁹_{Savill v Chase Holdings [1988] NZCA 113; [1989] 1 NZLR 257 (CA) at
304-305.}

¹⁰_{Levin Meats Ltd v Perfect Packaging Ltd [2011] NZHC 822; (2011) 10
NZCLC 264,950 (HC) at [46].}

¹²At 304. On the same point, the Court cited New Zealand Tenancy Bonds Ltd v Mooney [1986] 1

Packaging Ltd and indeed, after the first deposit by Levin the vendors, Perfect Packaging Ltd, sought to “tidy up” the paperwork, suggesting some amendments to the sales contract and looking for a personal guarantee. This drew the response from Mr Grey, as general manager and Chief Executive Officer of Levin, the buyer, that he was not a director or shareholder so could not provide a personal guarantee. The District Court Judge found that the agreement for sale and purchase signed by Mr Grey bound Levin as it was within Mr Grey’s apparent authority.

[76] On appeal, French J in the High Court upheld the reasoning of the District Court Judge. One of the features of the case upon which French J placed weight was that Mr Grey had previously signed contracts of similar importance to the contract at issue in the case.¹⁴The Judge found there were sufficient indicia to establish that, despite being only a Chief Executive Officer, Mr Grey had authority above what would be customary in that position to conclude contracts on behalf of the board of directors. She observed:

[60] In my view, there was more in this case. The evidence established that Levin Meats was a family-owned company with the directors residing in the North Island and never seen at the plant. While Mr Grey was in regular contact with one director and was required to file monthly reports to the board, it is clear he enjoyed a significant degree of autonomy. The directors did not even know that Mr Grey‘s business card showed him as the CEO, nor presumably that his email signature also stated that he was the Chief Executive Officer. When outsiders contacted the plant, Mr Grey was the only person available, and appeared to be in complete control. Further, and very significantly, Mr Grey had previously negotiated and signed contracts for the purchase of valuable capital items on behalf of the company. He was also placed in a position to be able to make payment of the deposits and the GST. There was an obvious lack of supervision and monitoring.

[61] The combined effect of these matters persuades me that, whatever the normal practice may be in meat processing companies, Levin Meats held out or represented to the world at large, and in particular Perfect, that Mr Grey did have the authority to enter into a contract of the type at issue. Section 18(1) and the conditions of ostensible authority at common law are satisfied.

[77] It is well established as an underpinning principle of common law that ostensible authority cannot be created by an unauthorised employee or representative, but must be held out by a person who does have authority to bind himself or the corporation and so has the ability to confer, by his conduct, ostensible

Where a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of that other person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent as if such a person had the authority that he was represented to have, even if he had no actual authority.

[78] The central question relevant to this issue is the scope of the representation. It need not be deliberately made by the principal.¹⁶Bowstead and Reynolds suggests two general types of case, neither of which is mutually exclusive, offering examples of representations that may cross the line in each:¹⁷

If the doctrine is based on the idea of representation, it may be suggested that the cases can be divided into two types. First ... cases where there is something that can be said to be something like a genuine representation (orally, in writing, by course of dealing or by allowing the agent to act in certain ways, e.g. entrusting him with the conduct of particular negotiations or allowing him to run a business that appears to be the principal’s business) by the principal of the agent’s authority, on which the third party relies: such cases could be called cases of “genuine apparent authority” and more easily (but not always perfectly) based on estoppel. Secondly, cases where the representation is only of a very general nature, and arises only from the principal’s putting the agent in a specific position carrying with it a usual authority, e.g. making him a partner or appointing him managing director, or using the services of a professional agent, viz. someone whose occupation normally gives him a usual authority to do things of a certain type ...

[79] As has been discussed above it is important to keep in mind that Mr Scott had been Kop-Coat’s Inc New Zealand manager for over 18 years operating a company with a turnover in the order of $20 million per annum. Over that period of time as a matter of fact he was being held out by the American parent company as its senior executive in New Zealand. The defence did not dispute Mr Scott’s evidence that he

¹⁶_{At [8-016]; Freeman & Lockyer v
Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.}

[80] To my mind a very important fact here is that Mr Probett, as the intended licensee via his company Incodo, or its nominee, was targeted by Kop-Coat to be an applicator of its Boron treatment for wood. As I have already referred to, Mr James identified Mr Probett. Mr James persuaded Incodo that this was a good deal and Mr Probett and his wife were introduced to Mr Scott. It would have been a socially difficult challenge for Mr Probett to query Mr Scott’s authority to bind Kop-Coat, especially in the context where the Probetts were very grateful that Kop-Coat had sought them out and presented them with this opportunity.

[81] Mr Probett and his wife had no reason to doubt the bona fides of Messrs James and Scott. Mr Scott, for one, was a long-term trusted executive of a prominent, and ultimately US-owned, company. When Mr Probett and his wife signed the contract they were dealing with a request by the senior executive of Kop- Coat in New Zealand, Mr Scott, for execution of the agreement. There was also no reason to doubt that Kop-Coat were serious in their intention to launch a product line in New Zealand. An email sent by Mr Probett to Mr James on 17 April 2015 reveals that Mr Probett had been making enquiries on Kop-Coat’s behalf for other licensees who could operate in other areas of the country. Executives, for example, Mr Clawson, were being sent from America to New Zealand to examine the chemical formula to be used. There was no question that Kop-Coat as a whole was not wholly invested in entering the New Zealand market for Boron applications, with the plaintiff, Incodo.

[82] Another important fact is that Mr Scott and Ms Armstrong were left substantially in charge of finding the New Zealand licensee. That is illustrated by the emails flowing from Ms Armstrong in which she mentioned she would need to have something “signed off” by the United States company.

[83] As we have seen from the emails sent by Mr Ward on the night of 22 May, he was talking in terms of final changes. The document had been negotiated for some time and, as I have already noted, at no time in the ensuing negotiations trying to rescue the deal, did Kop-Coat Inc or its parent company ever suggest that Mr Scott was a rogue employee. It was not until the contractual relationship was well and truly at an end that any suggestion emerged that Mr Scott had no actual authority to

sign. Rather, their immediate steps to execute the contract demonstrates a confidence that there was authority to contract with Incodo.

[84] Though Mr Scott’s representations as to his own authority are not sufficient to bind his principals, the context in which those representations emerged is important. Mr Probett’s evidence was that there was no mention in the meeting of the proffered agreements being an interim or draft contract that would or could be replaced. He records Mr Scott advising him that Incodo (now) had approval to get things up and running immediately. That Mr Scott explained that this was “a big thing” from Kop-Coat Inc’s point of view as Kop-Coat Inc was very protective of its intellectual property. This is evidence that orally Mr Scott was confirming that Incodo was now, post execution that day, a licensee.

[85] In context, I am persuaded that Mr Ward permitted it to be represented by Kop-Coat NZ that Mr Scott and Ms Armstrong had authority to conclude the deal on behalf of Kop-Coat NZ. They were left in charge of all negotiations in New Zealand. It was reasonable for the Probetts to rely on Mr Scott’s authority. He was a person who had the confidence of Kop-Coat NZ and in that sense, from the perspective of Mr and Mrs Probett, could be trusted to be acting on behalf and with the authority of Kop-Coat NZ.

[86] I therefore find Kop-Coat NZ cannot assert that Mr Scott did not have authority to bind it to the May 22 terms.

[87] The second question is whether or not the document executed on 22 May bound Kop-Coat Inc, the American parent company of Kop-Coat NZ.

[88] During the May meeting Mr Probett asked Mr Scott whether or not he could create a new entity as an assignee for the purposes of this contract and Mr Scott agreed, so Mr Probett added the words “or nominee” to the party name, Incodo. Mr Scott says he told Mr Probett it would be signed on behalf of Kop-Coat Inc at a later stage.

[89] There is no dispute on the background facts. There is no disputing Kop- Coat’s instruction to Mr James to look for a licensee for the Tru-Core product. I have already made the finding of fact that neither Mr Scott nor Ms Armstrong would have deliberately contradicted or disobeyed Mr Ward. On the probabilities, and thus the facts, they thought that the conversation they participated in earlier on 22 May did finalise the agreement so that it was ready for execution.

[90] This was a bona fide misunderstanding by both Mr Scott and Ms Armstrong of Mr Ward’s state of mind. They thought he had given them the final terms. Accordingly, Kop-Coat Inc cannot disavow the conduct of Mr Ward, from which Mr Scott and Ms Armstrong inferred they had authority to contract on those terms with Incodo.

[91] From the totality of the evidence, in my judgment Mr Ward did not think that he had completed and approved the final terms of the contract on 22 May. However, I am also satisfied that Mr Scott and Ms Armstrong assumed to the contrary, albeit incorrectly, that their conference with Mr Ward on that day had settled the final details of this contract which, as we have seen, had a reasonably long gestation period.

[92] Mr Ward never said he gave such an instruction. Rather, Mr Ward’s position was that these employees knew that they were not to sign anything on behalf of the company without his express say so. I accept Mr Ward was their senior. But Mr Scott and Ms Armstrong would not defy Mr Ward. It is another question as to how they interpreted the outcome of the telephone conference. Mr Scott and Ms Armstrong had no incentive to risk their livelihood by defying Mr Ward. After the phone call, Mr Scott and Ms Armstrong believed they had authority to get the agreement executed before the end of May.

[93] I make these findings taking into account the evidence of the disciplinary procedures that followed against Mr Scott leading to his resignation. I do not regard those procedures, which led to some degree of contriteness on the part of Mr Scott, to be a reliable indicator of Mr Scott’s state of mind on 22 May. In the disciplinary

proceedings he was trying to hang on to his career. It was appropriate for him to accept some culpability for the shambles that subsequently ensued.

[94] At the time, Mr and Mrs Probett had no reason to query the ostensible authority of Mr Scott to sign, nor his representation that the parent company would sign in due course. Indeed, when Mr Ward settled the July terms, he wrote to Ms Armstrong on 2 July:

Please see my final recommended changed in the attached agreement ... We do not need to go back thru Hannah [Bain, Russell McVeagh solicitor]. She has provided a good base for us to finish.

5. Please scan the final signed agreement and send to me by email. I will sign, scan and send back to you by email to provide them with a printed copy.

[95] I infer that was Mr Scott’s expectation on 22 May. He thought Mr Ward had settled the final terms and he could get a contract in place before the end of the financial year. Mr Probett’s evidence was that, at the meeting on 22 May:

Mr Scott signed the contract on behalf of Kop-Coat NZ and Kop-Coat Inc. I asked Mr Scott whether he was able to sign on behalf of Kop-Coat Inc and Mr Scott assured us he was. Mr Scott further advised the contract had been checked by Kop-Coat Inc’s lawyers in the United States and Kop-Coat NZ lawyers in New Zealand Russell McVeagh. The contract was initialled on each page by all the parties.

[96] Mr and Mrs Probett were not put on notice to suspect the signatures would not follow.

[97] I am thoroughly satisfied that Mr Scott and Ms Armstrong misconstrued the situation when getting the contract signed and thought they were carrying out their normal duties when executing the contract. I note that this line of reasoning is

another support for my prior conclusion of ostensible authority, that being a judgment made from the point of view of Mr and Mrs Probett.

[98] I conclude that it is more probable than not that Mr Scott considered he had authority to execute the contract which would bind Kop-Coat Inc as well as the New Zealand subsidiary. The contract depended on support by Kop-Coat Inc but that was a given as the contract had been settled by Mr Ward. That was the context when Mr Scott asked Mr Probett to sign, assuring him that Kop-Coat Inc, the overseas party, would sign in due course.

[99] For these reasons I conclude that in fact Kop-Coat Inc had held out Mr Scott as having authority to act on its behalf in New Zealand so that Mr Scott had apparent or ostensible authority to bind it to the agreement.

[100] There is no doubt that Mr and Mrs Probett on 22 May thought they had a contract, not that they had to await Kop-Coat Inc’s execution. They began to take a number of steps to ready themselves for business. Mr Probett listed 23 steps. It is not necessary to go through them all, but they included:

(d) drafting employment agreements; (e) terms and conditions of trading; (f) designing safety gear;

[101] To this end, they were in frequent contact with Ms Armstrong requesting logos and graphics etc. They were looking for the manual to be provided by Kop- Coat. There was never any indication those should await a concluded agreement.

[102] I conclude that at common law and as reflected in s 18 of the Companies Act, in the particular circumstances of this transaction Mr Scott bound the defendants to the agreement entered on 22 May.

At a most fundamental level the problems with the document were so profound, and the misalignment of the parties understanding as to where they were and the contracting process so pronounced, it is simply not possible to conclude that Incodo and Kop-Coat NZ were ad idem. Kop-Coat Inc was simply not involved.

[104] No authorities were cited for this proposition. The tag “ad idem” is frequently used. In a perfect contract the parties will be precisely ad idem. This was the Benthamite justification for such contracts to be a true finding of value. In such a contract there is a perfect meeting of minds of the contracting parties; the contract is a beautiful thing as it resolves the problem of all values being mere sentiment — there is no better identification of the value of what two parties will exchange, than evidence that each wants to do the exchange and is not anxious to do so.

[105] Unfortunately, there are not many perfect contracts in the real world. The common law and equity are much more pragmatic. Both recognise that errors as to the finitudes and the detail will not be fatal to the agreement. What the defendants must show, by this submission, is that the particular errors and mistakes were fatal to the underlying bargain.

[106] I do not consider they have done so. The mistakes went to questions of detail, not the fundamental basis of the intended contractual relationship, being the exchange of values between the parties; for Incodo to licence and operate a business

for the Tru-Core product. Indeed, Mr Ward noted to Mr Clawson, in an email dated

2 July 2015, when they were attempting to finalise details of the chemical formula:

It is ok to change formula. The formula in the agreement is allowed to be changed. We will just have to give them prices and charge them another royalty of NZ$1.00 per square meter of floor area.

[107] I am satisfied that details as to the price and formula were intended to be worked out over time. The mistakes in the May contract may well have been reparable by rectification. The core of the parties’ deal was not disrupted by the errors alleged.

[108] Further, it is impossible except at the most formal level to say as was submitted “Kop-Coat Inc was simply not involved”. Mr Ward, in the United States, was talking for Kop-Coat Inc. On the probabilities, Kop-Coat NZ would not have undertaken the task of finding a licensee for the Tru-Core product in New Zealand without the support of Kop-Coat Inc. There was no hostility on Mr Ward’s part to Kop-Coat NZ providing this product to New Zealand in the negotiations prior to and up to 22 July. Indeed, as I have noted, Mr Ward was talking about the “final” terms of the contract on that day, his time. Kop-Coat Inc was deeply involved in the process towards appointing a licensee in New Zealand to sell its Tru-Core product in New Zealand. Therefore, in my view the defendants cannot point to the role of Kop- Coat Inc in the process to suggest the parties were not ad idem.

[109] It is convenient to address here another of the defences pleaded, to the effect that if the 22 May agreement was a contract between Incodo and Kop-Coat, it did not commence as there were conditions precedent to be satisfied and they were not.

commence unless all of the following conditions are fulfilled (“conditions”):

(a) Kop-Coat being satisfied that Red Timber Limited has obtained all Authorisations necessary for the application of the Process in the Field in the Geographical Area; and

(b) Kop-Coat being satisfied that Red Timber Limited is capable of meeting the Kop-Coat Standards during the Term.

[111] There are two flaws to this argument. The first is that, as we have just seen, the position of the parent company is that there never was a contract. To be successful on this point, the defendants must satisfy the Court that there was a failure to meet the conditions, that such failure gave them a right to terminate and that they would have elected to terminate in all the circumstances. There is absolutely no evidence that Kop-Coat Inc’s or Kop-Coat NZ’s position from 22 May was that there was a failure to fulfil the conditions requisite for a contract. On the contrary, both Kop-Coat Inc and Kop-Coat NZ were trying to salvage the bargain they had with Incodo up until 29 July. In any event, if there were a failure to meet the conditions, it has not been proven that such a failure would give rise to rights of termination. Though the parties may expressly classify clauses as conditions, the Court may hold

that such a term does not justify termination in all the circumstances.¹⁸Looking

objectively at the actions of the parties between 22 May and 3 July, the Court is not satisfied Kop-Coat was desirous of terminating the agreement for failure to perform conditions precedent. At the very least, formal notice would need to have been given by Kop-Coat at a later date if Kop-Coat wanted to enforce condition 2.1.

[112] The second reason is that the claim by the plaintiff centres on the indisputable rejection of the May agreement having become a binding contract. Kop-Coat cannot avoid a finding that it breached the agreement by relying on condition 2.1 to argue that somehow the obligations under the contract did not trigger until Red Timber Ltd had obtained all authorisations and was capable of meeting the standards. It was, at the very least, required to recognise that there was a contract in place.

[113] For those reasons I do not consider the failure to perform conditions precedent was fatal to the formation of contract.

[114] Mr Scott had ostensible authority from Kop-Coat Inc and Kop Coat NZ to conclude the agreement. On that basis I consider there was a duly-formed contract

¹⁸Schuler AG v Wicklman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 (HL).

on 22 May and reject the arguments advanced to the contrary. I conclude that there is sufficient evidence for the Court to conclude that Kop-Coat Inc and its New Zealand subsidiary would not in the ordinary course of business take advantage of failures of execution of the signature block to dispute the existence of a contract such as this — being not a property deal, but establishing a rather modest commercial relationship.

[115] Mr Fraundorfer, counsel for the plaintiff, deployed the Contractual Mistakes Act in his closing submissions, without the statute being pleaded at all in the statements of claim. It would appear that relief was sought orally in the course of the trial under the Contractual Mistakes Act on the grounds that the full understanding of the mistakes in the May contract were only understood in the course of the trial.

[116] It was submitted to the Court that it could in its judgment exercise powers under the Contractual Mistakes Act to rectify the pricing errors in the May agreement and to recognise the need for the agreement to be a six-year term rather than a three-year term. This is still consistent with leaving the contract being repudiated by Kop-Coat but enabling an award of damages based on the ability to trade profitably under the terms of the May contract with the mistakes rectified. The argument for relief was phrased in the following way:

[R]egardless what is important is that the Court uses the powers under s 7 and constructs a contract that is fair to both parties and reflects what each was trying to achieve. Hence for the purposes of the plaintiff’s case, the important point is that the CMA applies to the contract between the parties.

[117] That is, the plaintiff’s deployment of the Contractual Mistakes Act relates to the terms of the contract that has been concluded. If the contract were repudiated by Kop-Coat (discussed below), this issue essentially goes to damages.

[118] Mr Fraundorfer submitted that a legal question arises as to whether s 6(1)(a)(ii) or s 6(1)(a)(iii) applies to the facts:

(1) A court may in the course of any proceedings or on application made for the purpose grant relief under section 7 to any party to a contract—

(ii) all the parties to the contract were influenced in their respective decisions to enter into the contract by the same mistake; or

(iii) that party and at least 1 other party (not being a party having substantially the same interest under the contract as the party seeking relief) were each influenced in their respective decisions to enter into the contract by a different mistake about the same matter of fact or of law; ...

[119] I have found that the plaintiff and the first and second defendants entered into a binding contract on 22 May. The parties were intending that to be an effective contract defining the terms of a future relationship as licensor and licensee of the Kop-Coat product. On the day of execution both parties were unaware that there were pricing mistakes.

[120] Had Kop-Coat NZ and Kop-Coat Inc accepted from the outset that a contract had been executed on 22 May and had bound them, it would have been necessary for the parties to co-operatively address the patent mistakes in that contract, as Mr Ward was endeavouring to do in his email of 29 July. In the absence of sensible negotiations, in my judgment either party could have had recourse to the Contractual Mistakes Act, on that set of facts.

[121] The events on 3 July are not in dispute. Ms Armstrong presented Mr Probett with a new contract for him to sign. In context, she was unambiguously saying that Mr Probett’s company could not rely on the earlier contract. In acting on instructions from Mr Ward, Ms Armstrong was at that time speaking with actual authority to bind Kop-Coat Inc as well as Kop-Coat NZ. Her behaviour is consistent

with an unwillingness to deviate from the simple requirement that Mr Probett sign a new contract on behalf of the company he would elect to operate the business.¹⁹

[122] There is an abundance of evidence that Kop-Coat Inc did not regard the document dated 22 May as a contract. The plaintiff’s counsel correctly relied on the following facts illustrating that point:

(a) Mr Ward intervened on 28 July. He said, inter alia: “I have learned that our team amended an existing Australian agreement format to present to you in May which had not been reviewed by a director or by our lawyers. Unfortunately, the Australian agreement ... is not suitable for your purposes.”

(b) On 30 July, in the course of a long email chain between Messrs Ward and Probett, Mr Ward said, “It is my understanding that the May contract was not completed rather than being cancelled.”

[123] I am satisfied that by Ms Armstrong presenting a new contract for signature, and through the email correspondence that followed, Kop-Coat Inc and Kop-Coat NZ repudiated their 22 May agreement with Incodo.

[124] In an argument closely related to their denial of repudiation, the defendants argue that Mr Probett, in effect, declined the opportunity to pursue the business on a cost structure that was equivalent to that under the May document. That decision, it was submitted, was the effective cause of the loss of the opportunity for which

[125] At first sight, the prices in the 3 July agreement looked a lot higher than the prices in the May agreement. Mr Probett asked his son Blake to analyse the July agreement. Blake was extremely critical of the agreement. From the time Blake completed his analysis and reported to his father, father and son lost confidence in Kop-Coat NZ and Kop-Coat Inc.

[126] The Probetts’ concerns were not just about price. Blake prepared a file note comparing the May and July terms of trade. In the July contract Kop-Coat Inc is removed as a party. Rather, Kop-Coat Inc proffered a draft contract between only Kop-Coat NZ and Incodo’s nominee, Red Timber Ltd. Only Kop-Coat equipment could be used to apply the technology. The Probetts considered that Kop-Coat NZ’s control of equipment could be used against the interests of Incodo. The grant of an exclusive licence in the Auckland area was removed. Kop-Coat had more freedom on future price changes.

[127] At the trial Mr Probett described his reaction to the relationship with Kop- Coat Inc and Kop-Coat NZ, starting from receipt of the second contract on 3 July.

Sir, things changed so much from the 3rd of July. We had a signed contract. We thought we were in a fantastic relationship. We were in the honeymoon period. On the 3rd of July we felt, to be blunt, we thought we were married to Godzilla. It had changed that quickly. It changed in 10 minutes when the new contract was dropped on our desk with no explanation, no contact, we had a death of anything, we had one brief meeting with Cameron [Scott] when he uttered his expletive deleted comment about what had gone, been gone on and that was basically the end of it. We thought this is going really pear-shaped and if we pursue this we gonna get chewed

[128] Mr Probett then had his son go through the July Document line-by-line to identify changes. First, it is apparent that Incodo misunderstood some of the changes. For example:

(a) Both the May Document and the July Document provided formulae that were ostensibly sufficient to treat a standard house. The batch price (with errors corrected) under the May Document was $1,290. The batch price under the July Document was $1,490. That increase was not, in fact, the “extraordinarily dramatic” increase Incodo

perceived it to be. It was even less dramatic when one takes account of the fact that a batch under the July Document was sufficient to treat a standard home defined as 10m³ which is equivalent to 4.7 homes of

150m² of framing area, as per the May agreement (in fact, the chemical cost per 150m² unit is less under the July document).

(b) Incodo assumed that the royalties payable had increased from $3 per square metre to $6 per square metre under the July document. In fact, the increase was to $4 per square metre. A further $1 royalty was payable for each of two additional ingredients if Incodo wished to have them included — they were optional extras not provided for in the May agreement.

[129] Incodo’s review reveals a tendency to suspect ill-intent from Kop-Coat. For example:

(a) The July document removed a clause that provided, in relation to the contractual consequences of not reaching the minimum sales thresholds, that “Kop-Coat undertakes to be reasonable and appreciates market forces may impact on sales”. Incodo’s review in relation to that change noted “Kop-Coat does not wish to be reasonable anymore”.

(b) The May agreement contained a formula for a 450 kg batch that was ostensibly sufficient to treat an average house. The July document contained a different formula using different chemicals for a 400 kg batch that was also ostensibly sufficient to treat an average house. Notwithstanding that both formulae were sufficient to treat an average house, Incodo’s review focussed on the lighter batch weight and concluded “Decreasing the amount of the mix hides the true increase of the already massive price increases that Kop-Coat inflicts on Incodo. It also sneakily increases the profit % for Kop-Coat.”

[130] By the time of the position paper dated 11 July (only eight afters after receiving the July document), as well as raising the possibility of litigation, Mr Probett was already emphasising that Incodo:

... had lost trust in the integrity of Kop-Coat Inc and are genuinely concerned that if Tru-Core Mobile could work in New Zealand with Kop- Coat NZ, we would always be at risk of retribution.

That the practicality is that Tru-Core mobile in New Zealand needs a good relationship with Kop-Coat NZ, their servicing equipment and a guaranteed stream of product over many years. “Inadvertent” hiccups in supply would kill the company, and given what has been happening I don’t have confidence that supply or other problems will not occur.

[132] These are but examples of numerous expressions of loss of confidence from Mr Probett. In the ensuing weeks Mr Probett complained to Kop-Coat Inc and to its ultimate parent company, RPM International. He expressed his loss of confidence to the United States in an email to Mr Hernandez, the director of Global Compliance of Kop-Coat Inc, on 4 August, questioning their integrity. He wrote a letter to Mr Sullivan the chairman and CEO of RPM International, the ultimate owner of Kop- Coat, saying inter alia:

...plus my real fear is that our complaints would be taken personally and if we did go ahead we could and would be vulnerable to “inadvertent” material supply issues or unduly hard enforcement of contractual provisions – in other words get pay back for whistle blowing.

[133] It was in this context of complaints that on 29 July and through August Mr Ward offered to take the July document and amend it to allow for the fees, royalties, minimum targets and costs as per the May document. It was submitted that, in essence, Mr Ward was offering to restore Incodo to the position it would have been in under the May document, but with an effective formula. That offer was not taken up.

[134] The 29 July intervention by Mr Ward was sent by email directly to Incodo and copied to Kop-Coat’s New Zealand office for the attention of Ms Armstrong. It was titled “Review of Issues and Recommendations” and reads:

Regarding the TRU-CORE Process Field Spray program, I would like to provide you with a short review of my knowledge of the issues and then to present a recommended solution for your consideration.

We apologize for the problems and delays in working with you to initiate a field spray license program for your company, Red Timber Limited (the nominee). We understand that you want to be able to use our TRU-CORE Process technology to remedially field spray treat existing wooden structures

I have learned that our team amended an existing Australian agreement format to present to you in May which had not been reviewed by a director or by our lawyers. Unfortunately, the Australian agreement applied specifically to the Boron Solutions TRU-CORE Codemark program ... and is not suitable for your purposes. The team realized that there were substantial issues in what was presented to you, and they then asked in June for help to develop a specific agreement for you. This new agreement was completed after several drafts and presented to you on July 15 [in fact on

diverted by the close of the financial year on 31 May, as well as the initiation of a new Total Quality Management program.

Last week the team requested my help to review the issues as I indicated in my email to you.

After my review of the issues, I recommend that we take the new format presented to you 15 [3] July and amend it to allow for the fees, royalties, minimum targets, and costs that were contained in the May format. There are important points of clarification that need to be made as follows:

a. No additional Royalty would be added in this section for the use of the Equipment. Royalty for the use of the Equipment was inserted in this section in the July format and will be removed. ...

b. The Royalties apply to every square meter of wall and or floor space to which the TRU-CORE treatment is applied to as per the statement in the May format.

a. The table does not show a modern formula for best performance to be able to meet NZ 3640 H1.2 Boron. It needs to be corrected to the formula in the July format.

b. The prices shown in the column NZ$ per Litre Price, and the column Mix (litres) are mostly correct (with one issue) for this old style formula; however, the numbers shown in the column Mix Cost (NZ$) are not correct. This column

was supposed to show the result of multiplying the per litre price and the mix amount for each input. The correct numbers, which are discernible from the per litre price and the mix amount, are as follows:

c. Therefore, based on the Prices and Mix, the total 450 KG batch cost is NZ$1007.89 without the DOT and not NZ$451.93. With the DOT included the total cost of a 450

d. As a gesture of goodwill, the recommendation is to apply discounts to all of the inputs shown in the July format (modern formula for H1.2 Boron) agreement so that you can achieve the total 450 kilogram batch cost of NZ$1,300.05.

To further address your concerns, the formula set up in the July format (as well as the May format if the DOT Mix was identified) is intended to achieve the H1.2 Boron loading of 0.4% BAE in a single application rather than 3 applications. ... Unfortunately, there was miscommunication about your program to our team members who develop the manuals; ... The manual provided to you was a draft amended from an Australia manual intended to receive input from team members and not a final manual for distribution. If you decide to continue with this program, a new completely re-developed manual would be provided.

Please let me know if you would like us to make the changes to the July format that are outlined in this email. Please let me know if you would like us to develop a new manual for you.

[135] Messrs Probett approached Mr Ward’s proposals in a hostile fashion, understandably. But that led to errors of analysis or, more accurately, failure to appreciate that the actual cost over defined areas was not significantly different from the 22 May agreement.

[136] In a later email of 17 August, Mr Ward explained that, contract or not, Kop- Coat intended to continue to develop the field spray programme to a state of readiness and was prepared to share actual treatment costs.

[137] None of Mr Ward’s initiatives was acceptable. Mr Probett’s position and the position of Incodo essentially remained a loss of confidence and an unwillingness to go into business with Kop-Coat because of this loss of confidence.

[138] The question is whether by this want of confidence Incodo was the cause of its own loss in failing to accept Mr Ward’s offers. There is substance to this argument. The cost structure proposed by Mr Ward on 29 July was, when explained, equivalent to the May document and so there is substance to the proposition that Mr Probett is the author of the plaintiff’s loss.

[139] But other factors motivating Messrs Probett need to be taken into account.

[140] Mr Probett did not accept the apology appearing in the second paragraph of the 29 July email. Overall, in the course of the trial it was my assessment that he had lost confidence with the defendants from the receipt of the second agreement on 3

[141] There was no evidence that there was any warmth in the relationship between Mr Probett and Mr Ward in the latter’s visits to New Zealand. Mr Probett and his family had gone from the situation where they had been approached and courted by Kop-Coat NZ to be their licensee in New Zealand for Tru-Core, to, on the other hand, receiving a detailed response on 29 July from Mr Ward, the second paragraph of which presents the relationship as though there was never an approach from Kop- Coat to Incodo, but rather, it was Incodo who were wanting this transaction:

There is no expression of regret about the mistakes in the May draft of a “we are in this together, let’s make it a success” tenor. Those quoted sentences either ignore or are ignorant of the fact that Messrs James and Scott, as senior employees of Kop- Coat NZ, identified and pursued Mr Probett to be a licensee.

[142] One must not lose sight of the context. Kop-Coat Inc is a giant of a company and by contrast the Probett family operated a small business in New Zealand. In the email of 29 July there is also a patronising reference to “a gesture of goodwill”.

[143] With regard to this context, I am not persuaded on the probabilities that it was Mr Probett’s response to the revised cost structure received on 29 July which was the effective cause of the lost opportunity for which he now seeks damages. Rather it is my judgment, on the probabilities, that because of the loss of confidence by Mr Probett and his son in Kop-Coat Inc, from 3 July they did not analyse objectively the propositions being put to them by Mr Ward from 29 July. Nor, it would seem, did they have the opportunity at that stage to be informed of the potential remedial application of the Contractual Mistakes Act 1977, and of equitable doctrines such as rectification, in order to deal with the patent errors in the contract which they wished to proceed on — that of 22 May.

[144] Therefore, I am not persuaded on the probabilities that Incodo caused its own loss by failing, following Kop-Coat’s repudiation, to enter into a new agreement. It was entitled to take the view it had no faith in Kop-Coat NZ and act accordingly, however mistaken that impression may be with the power of hindsight.

Was Incodo induced to enter the contract by any pre-contractual misrepresentations?

8. Prior to the signing of the Contract, representations were made by Kop-Coat NZ Ltd and Kop-Coat Inc as to the viability of the contract.

(c) the system was virtually identical to the Boronsolutions programme which was successfully operating in Australia, and would operate more efficiently in New Zealand due to the residual salt level;

(d) Pilot testing in Auckland using the specific piece of equipment stated in the Contract had been successful;

[146] In closing submissions counsel for the plaintiff examined the evidence of the two experts called by the defendants. First, the defendants called Mr Bailey, a quantity surveyor, who said that the product as envisaged by the parties would fail. He said that the market was declining; that the competitor, Framesaver, would be cheaper and would become even cheaper still than Tru-Core; and that there were no material advantages to the product.

[147] Secondly, they called Mr Wattie, a forensic accountant. He gave evidence that the venture was likely, at best, to achieve returns so small they were less than his suggested percentage for risk.

[148] The plaintiff relied on Mr Ward’s evidence that formula and ingredients that had been discussed throughout (excluding the July proposal), would not have worked. In essence Kop-Coat had provided a formula which would not achieve what was required.

[149] It was submitted these positions go against the pre-contractual representations made to Incodo which induced Incodo to enter the contract. The plaintiff relied on the Contractual Remedies Act 1979, particularly s 6(1)(a):

(1) If a party to a contract has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made to him by or on behalf of another party to that contract—

(a) he shall be entitled to damages from that other party in the same manner and to the same extent as if the representation were a term of the contract that has been broken ...

[150] The plaintiff relied on Esso Petroleum Co Ltd v Mardon where a would-be buyer was misled as to the through-put of a petrol station over three years.²⁰

[151] The two experts, Mr Bailey and Mr Wattie, are independent experts. They were not involved at all in the formation of the contract. Their evidence relates to the size of the defendants’ liability for damages, if any. It indicates nothing more than the defendants’ post-facto view of the deal.

[152] In July, Mr Ward did identify mistakes in the formula and the ingredients in the May contract. As I have indicated above, most of these were patent. In the 29

July document Mr Ward set about rectifying and correcting this. There is no evidence that price was a consideration. There was no evidence of scrutiny of the price. Had there been, the patent errors would have been noticed. It may seem odd to say there was no scrutiny as to price. But there was no evidence led to it. That does not surprise me.

[153] The contract was entered into on 22 May after a relationship of confidence had been built up between Mr James and Mr Scott on Kop-Coat’s part and Messrs Probett for Incodo. Both parties had a common interest in the cost of the product being consistent with profitability. There was no reason to suspect at that time there would be anything but a reasonable price. The material facts in this case are not remotely similar to those in Esso Petroleum Co Ltd v Mardon.

[154] I heard no evidence that suggested that Tru-Core would not do the job if properly applied. There was confidence expressed on Kop-Coat’s part that the contract would be successful, but in no way does that turn into any guarantee of success or contractual obligation of such success.

[155] Given the lack of evidence of any material misrepresentation, the claims under the Contractual Remedies Act fail.

[156] This cause of action is based upon the conduct of Kop-Coat NZ. The plaintiff pleads that after the agreement was signed in May, Kop-Coat NZ and the plaintiff began to perform the contract by getting ready cooperatively to launch the business. The pleading goes on to say that throughout this time the contract was never referred to as a draft contract. As part of this preparation, Incodo had taken steps to set up its

business, including employing staff. It is argued the conduct of Kop-Coat NZ at this time was misleading or deceptive in terms of the Fair Trading Act 1986. It was submitted that it is irrelevant whether Kop-Coat had any intention to mislead or deceive.

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

[158] At Kop-Coat NZ, Mr Scott and Ms Armstrong were in a predicament. From the time they woke up on 23 May, they knew that Mr Ward was not of the view that he and they had settled the final terms of the contract the day before. They continued to deal with Mr Probett’s request for materials (inter alia) without telling him of their problem internally — that they had a signed agreement with Incodo.

[159] I am quite sure that Mr Scott and Ms Armstrong were not deliberately engaging in misleading and deceptive conduct leading the plaintiff to believe that they were forming a business relationship with Kop-Coat Inc and Kop-Coat NZ. I agree with the submission for the defence that the alleged conduct is at least consistent with the parties preparing to do business, itself a form of business relationship. But I also agree that objectively the behaviour of the New Zealand office responding to Messrs Probett (who were acting consistently with an agreed contract formed on 22 May), was objectively misleading and deceptive conduct. Kop-Coat NZ was engaging with Incodo as if there were a binding agreement. Given, the knowledge of Kop-Coat NZ’s agents, that Kop-Coat Inc did not know of the signing and wanted changes to the “draft”, this conduct of Kop-Coat NZ was misleading.

[160] However, it is quite another thing as to whether or not there should be any separate award of damages for breach of the Fair Trading Act. As is so often the case, Fair Trading Act arguments can overlay common law causes of action. In any event, damages for breaches of s 9 of the Fair Trading Act are discretionary.²¹

[161] I agree with counsel for Kop-Coat NZ that the pleading for relief is vague: “damages for the costs incurred by the plaintiffs as a result of the defendants’ conduct”. For reasons which become apparent when I address the loss of the chance remedy, I am of the view that that relief overtakes any incidental waste of time in Incodo’s dealings with Kop-Coat NZ prior to the detailed offer of new terms on 29

[162] As noted in the opening paragraph, there is a proposed fourth amended statement of claim. In it, the plaintiff seeks to introduce a further cause of action in estoppel concerning representations to the alleged effect that there would be a six- year business relationship. I do not give leave to sue on the proposed fourth amended statement of claim.

[163] In a similar fashion to my remark before, it is often the case in common law litigation that various remedies can overlap each other. Having found there is a contract, it is redundant to examine estoppel short of contract.

[164] The proposed pleadings also allege reliance on representations which led to reasonable expectations as to profitability of the relationship. I have already rejected that as a cause of action pointing out that the material facts of this case fall far short of those in the Esso Petroleum line of authority.

[165] For the reasons given above, I am satisfied that a contract was entered into between the plaintiff and the first and second defendants on 22 May 2015.

[166] When the agreement was executed on 22 May, neither the signatories for Incodo (Mr and Mrs Probett), nor the signatory for the first defendant (Mr Scott) were aware of the mistakes in the contract, centred upon its formulae. These mistakes were identified by Mr Ward but had not been appreciated by the respective parties’ representatives in New Zealand at the time of execution on 22 May. In that

later regard, I am satisfied that this Court had the jurisdiction under s 6(1)(a)(ii) of the Contractual Mistakes Act 1977 to grant relief, to correct mistakes in the 22 May agreement had the parties wanted to.

[167] I find, however, that through their actions on 3 July onwards, the defendants repudiated the 22 May agreement. That was a breach of contract sufficient to establish the plaintiff’s first cause of action for breach of contract.

[168] I have found that the actions of Kop-Coat NZ’s representatives, following execution of the 22 May agreement was, objectively, misleading conduct. Though they did not engage in that conduct intentionally, it is sufficient to establish breach of s 9 of the Fair Trading Act. Nonetheless, I make no independent award of damages for that breach; preferring instead to examine damages in accordance with the first cause of action, given the relative overlap of those claims.

[169] The claims under the Contractual Remedies Act fail as there is insufficient evidence of misrepresentation. The presentation of the 22 May contract was in good faith. There was no misrepresentation.

[170] I have declined leave to sue on the fourth amended statement of claim. It is therefore unnecessary to examine the claim for estoppel or relief under the Contractual Mistakes Act. In any event, my finding on the first cause of action renders this argument unnecessary.

[171] Incodo is entitled to damages against both defendants for repudiation of the

contract, Incodo’s claim is for millions of dollars for lost profits over the life of the

contract. The contract was for a three-year term with an option for Kop-Coat to grant a further three years. Several issues arise for determination. I deal with them in the following order:

[172] This kind of damages claim is known to lawyers as “loss of a chance” analysis, for the claim for damages is built on an analysis of the loss of the benefit of what was promised in the contract which was repudiated. Loss of a chance has its own special principles to be followed when assessing damages. It is not dependent on facts found to be proved as more probable than not. Rather, it is dependent on the likelihood of the benefit eventuating.

[173] The law of damages for loss of a chance arises in circumstances where there is insufficient certainty to justify a standard claim for damages. I am assisted by Professor SM Waddams in The Law of Damages, where he says:²²

In many cases the loss claimed by the plaintiff depends on uncertainties; these are of two kinds: first, imperfect knowledge of facts that could theoretically be known and secondly, the uncertainty of attempting to estimate the position the plaintiff would have occupied in hypothetical

²²SM Waddams The Law of Damages (5th ed, Canada Law Book, Toronto, 2012) at [13.10] and

circumstances, that is to say, supposing the wrong complained of had not been done.

In Anglo-Canadian law ... perhaps because of the decline in the use of the jury, the courts have consistently held that if the plaintiff establishes that a loss has probably been suffered, the difficulty of determining the amount of it can never excuse the wrongdoer from paying damages. If the amount is difficult to estimate, the tribunal must simply do its best on the material available, though of course if the plaintiff has not adduced evidence that might have been expected to be adduced if the claim were sound, the omission will tell against the plaintiff.

As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done. To insist upon less would be to relax old and intelligible principles. To insist upon more would be the vainest pedantry.

[175] One of the leading cases on losses of chance is Chaplin v Hicks.²⁴The plaintiff was one of 50 people shortlisted for 12 positions. The defendants, in breach of contract, failed to give the plaintiff an opportunity to be interviewed and the 12 positions were filled from the other 49 persons. The English Court of Appeal held that the plaintiff was entitled to proportionate damages for the loss of a chance and that the jury at first instance had correctly assessed the damages. Fletcher Moulton

I cannot lay down any rule as to the measure of damages in such a case; this must be left to the good sense of the jury. They must of course give effect to the consideration that the plaintiff's chance is only one out of four and that they cannot tell whether she would have ultimately proved to be the winner. But having considered all this they may well think that it is of considerable pecuniary value to have got into so small a class, and they must assess the damages accordingly.

[176] Whatever the degree of difficulty, it does seem quite clear that the positive duty is on the Court to assess the percentage of chance. It is not a probability finding. Lord Diplock in the case of Mallett v McMonagle said:²⁶

The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions of determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.

This dictum was applied and followed by the Court of Appeal in Takaro Properties Ltd v Rowling.²⁷I find it useful to cite some passages from the judgment in that case. Woodhouse P cited Lord Reid in Davies v Taylor, where that great Judge said:²⁸

The assessment of damages is much more difficult. The evidence bearing on it verges on the exiguous, largely because the claim was formulated on a wrong basis ... I agree with Woodhouse P that the Judge, too, did not apply the correct test. As I read his judgment, he did not regard damages as automatically ruled out by his finding that it was improbable that Takaro could have achieved and maintained a profitable operation. What he regarded as fatal was his finding that the consortium would have failed, and with it the whole project. He [the trial Judge] foresaw “nothing but disaster”. That approach leaves out any possibility of the ultimate success of the whole project. If there was some real possibility it must have had some commercial value, however hard to assess, and damages should be awarded accordingly. It is true, as the Judge said, that the consortium were able to cut their losses if the plan did not work, but I do not think that such experienced

²⁷Takaro Properties Ltd v Rowling [1986] NZCA 27; [1986] 1 NZLR 22 (CA) at 63 per Woodhouse P. See generally

business entrepreneurs as Mitsubishi and the consortium members – Sir Clifford Plimmer, Mr Douglas Myers, Mr CJ Tse – would have become associated with the project to the extent that they were unless there had been some real chance of success.

[178] Somers J made a similar point.³⁰Having observed, “[t]here is not much

evidence from which this [the future business] can be assessed”, he went on:³¹

The factors are mentioned in the judgment of the President and no good purpose would be served by repeating them. But it should at least be noticed that business concerns such as the Tse Group and Mitsubishi were sufficiently persuaded of the likelihood of success to undertake to venture comparatively large sums of money. These and other matters mentioned in the President’s judgment largely go to the estimation of the quality of the chance, whether it was an even chance or better or worse than even.

[179] These principles have widespread recognition in Commonwealth courts; this reasoning of the New Zealand Court of Appeal has been followed by the Australian High Court in Sellars v Adelaide Petroleum NL.³²It is against this framework that I assess the loss of chance arising out of the defendants’ breach in this case.

[180] Both the plaintiff and the defendants engaged experts to obtain their opinion as to the profitability of the May agreement over three years or over six years. The Court had the benefit of three experts. For the plaintiff, Incodo, Mr John Leonard — a forensic accountant. For the defendants’ two experts: Mr G R Bailey and Mr Bruce Wattie. Mr Bailey is a specialist in dispute resolution for construction disputes and a registered quantity surveyor, who has acted as an expert witness on over 50 occasions in proceedings in the High Court, District Court, and in arbitrations and weathertight tribunal applications. The second witness for the defendants, Mr Wattie, is a partner at Pricewaterhouse Coopers (PwC) and also a

[181] It is important to distinguish immediately an opinion as to the profitability of the May agreement over three or six years from an assessment of the chances of the May agreement being profitable and by degrees, over that time. The former task is a finding as to probability. The second task is a finding as to possibility and then an assessment of the chances of that possibility being realised. It is the latter task which must guide the Court.

Relevance of Kop-Coat’s decision to enter the market with its Tru-Core Boron treatment

[182] Before I analyse the opinions of the experts I need to introduce into the analysis a perspective that I put to the experts in the course of the trial. In my view it is the same perspective taken by Lord Diplock, Lord Reid, Fletcher Moulton LJ, Woodhouse P, Cooke and Somers JJ in the passages quoted above.³³This view was that when assessing the chances of Incodo being profitable under the 22 May contract, it is important to keep in mind that by the terms of the contract Incodo was

a licensee of Kop-Coat’s product, Tru-Core. This contract was entered into by Kop- Coat Inc and Kop-Coat NZ, for the purpose of making a profit. So at that time, it was Kop-Coat Inc’s business assessment that it was worthwhile introducing this product into the New Zealand market. It was Kop-Coat NZ’s local men on the ground, Mr James and Mr Scott, who judged that Mr Paul Probett was the most suitable person for introducing the product to the New Zealand market for treating timber framing damaged by leaks in buildings. Inherently it was their assessment at the time that such entry would be profitable. In short Messrs James, Scott and Probett all believed the venture would be profitable.

[183] By stark contrast, the evidence of the two experts called at the trial for Kop- Coat approached the success of Incodo, or not, without placing any weight on, or even recognising, the likelihood that Mr James and Mr Scott had made a reasonable and practical assessment of market opportunities of Tru-Core and the capabilities of Mr Paul Probett. The two experts never factored-in that Kop-Coat would have the incentive to support their licensee. Effectively they approached the issue on the basis Kop-Coat did not enter into the agreement with an incentive to support Incodo.

[184] The expert witnesses called by the defendants also opined that Incodo was never going to be able to make a profit because the market was too small. By making that assessment, the experts essentially rejected the market assessment made by experienced employees of their client. Yet Kop-Coat Inc and Kop-Coat NZ were part of a very sophisticated and large commercial company, with a long-standing presence in New Zealand at the time the contract was proposed.

[185] I divide my assessment of the expert evidence into three categories: (a) The overall size of the market;

[187] There is a difference between the parties as to the nature of the market, as well as to its size. The defendants’ experts predominately (though not exclusively) treat the market as confined to application of Tru-Core to damaged framing of separate dwelling houses. Yet in the licence and supply agreement signed on 22

[188] As discussed above Mr Paul Probett, the senior director of the plaintiff, is himself a building forensic specialist and registered building surveyor, with 48 years of experience in the industry. For the past 12 years he had acted as a weathertight homes assessor, reporting on around 600 claims.

[189] After they had entered into the licence on 22 May the directors of the plaintiff, Incodo, approached a number of their contacts to market the Tru-Core product and enclosed a brochure. As a result, Incodo had an approach from Cove Kinloch (Architects) of Hamilton suggesting they would use Incodo for all their remediation work and indicated that this might be 70 to 100 jobs per year. Naylor Love (Architects) telephoned them asking whether Incodo could help on large multi- units they were remediating in Mount Maunganui. Incodo also had an expression of interest from O’Hagan Consultants who asked if they could help them with 300-400 apartments.

[190] Based on this evidence the market for this product at the time of the repudiation was not confined to the remediation of houses, but included the remediation of commercial buildings, including apartment buildings.

[191] The expert called by the plaintiffs, Mr John Leonard, read and considered the briefs of evidence of the plaintiffs including Mr Paul Probett. He did not confine the market to separate dwellings, although to a degree he appeared to do that, because his costing worked on a standard dwelling of 150 square metres and he talked in terms in that context of a standard frame house. But in the course of discussing productivity he said:

We consider this productivity to be reasonable in that many of the leaky buildings are apartment blocks and complexes and stand-alone buildings are on average likely to be considerably larger resulting in greater revenue.

[192] Mr Wattie, for the defendants, wrote his brief of evidence of 11 April 2017 in

I have been instructed by Russell McVeagh to analyse and comment on certain aspects of the assumptions used by the plaintiff’s expert, Mr Leonard, to produce the financial forecasts that support Mr Leonard’s quantification of the damages allegedly suffered by Incodo.

[193] An important part of Mr Wattie’s evidence is his critique of “sales volumes”.

There is no rationale or basis for the forecast number of units, the average area per unit or the assumed selling price in Mr Leonard’s brief of evidence, or of any other evidence proposed by Incodo. It appears he has relied on

advice from Incodo about what to assume for unit sales. However, we are not aware of any evidence of that advice or any analysis undertaken by Incodo or anyone else to support the assumed number of units.

[194] It would appear that Mr Wattie did not know of Mr Probett’s profession, or of the inquiries from and the responses of Cove Kinlock, Naylor Love, and O’Hagan Consultants.

[195] To derive his forecast, Mr Wattie used as his “evidence base” the data from the Weathertight Homes Resolution Service (WHRS). He selected the WHRS data because he believed it identified the market of home owners actively seeking funds for repair. Here are his two paragraphs on that topic:

MBIE publishes statistics on claims before, and resolved under, the Weathertight Homes Resolution Service (WHRS). The WHRS is run in conjunction with the Ministry of Justice. It is designed to be a streamlined process to enable leaky home owners to pursue claims to repair their properties.

There is evidence that a large percentage of leaky home owners are either not pursuing repair or have not recognised/are not aware of their property’s failings and may not do so in the immediate future. We have assumed for the purpose of the analysis in this paper that claims before the WHRS are indicative of the market for leaky home remediation as they indicate homeowners actively seeking funds for repair.

The number of open WHRS claims has dropped, both within Auckland and throughout New Zealand. The net reduction in claims within Auckland over the past three years is set out below.

[197] The data he takes run from March 2014 to March 2017. Mr Wattie’s table on this point shows that there is a reduction in property claims within the Auckland region before the WHRS, beginning in March 2016 (297) to March 2017 (197). He also offered a table of new claims being submitted to the WHRS, which shows a dramatic drop off from claims in November 2011 (248) to November 2016 (36).

The Weathertight Homes Resolution Service Act (2006) places a 10 year limitation on claims and experts consider homes built after 2005 constitute

0.1% of potential leaky homes failures. This suggests that the majority of eligible leaky houses should now be before the WHRS. Consequently, it is reasonable to expect that open claims should continue to decline.

[199] I make two preliminary comments on these observations. First, the WHRS is focused on leaky separate dwelling claims. Larger apartment building claims tend to be filed in the High Court. Secondly, his analysis carries an assumption that persons entitled to bring claims before the WHRS will bring claims. This assumption ignores potential claimants who are not aware their homes or apartments are leaking and need remediation. It also overlooks that some homeowners may be in denial, if they are aware. Neither of those assumptions changes the fact that there is an underlying leaky building in need of remediation at some point in time.

2011. It has run its course. It was designed to support WHRS claimants without the need to pursue non-government parties for repair costs. Under the scheme, the government would fund 25 per cent of repairs and, if liable, the Council would refund a further 25 per cent — leaving the remaining 50 per cent to be paid by the WHRS. Eligibility for the package expired on 23 July 2016.³⁵This likely explains the sharp drop in claims to November 2016. But it does not mean that there are no more untreated leaky homes.³⁶And it says nothing about re-cladding blocks of apartments.

Accordingly, we consider it reasonable to assume that claims within the 5 years prior to July 2016 have been higher than repairs that will be sought in the future – home owners aware of their leaky house issues will have been incentivised to apply to the WHRS so their claim was eligible for the Financial Assistance Package.

[202] As a result Mr Wattie limited his analysis of market size principally to WHRS

data, reporting that statistics are limited for weathertight building cases before the

[203] As advised to counsel at the trial, I was one of three Judges in Auckland who actively managed High Court leaky building claims filed in the Auckland Registry. I am not aware of any comprehensive collection of data which would indicate the total number of apartment blocks currently the subject of claims in the High Court, let alone the potential number of apartment blocks now falling outside the 10-year limitation period but nonetheless have to be remediated. There is overall a paucity of data.

[204] This Court, however, cannot accept a definition of the potential scale of the market for Kop-Coat’s products as likely predicted substantially by the scale of new claims and estimated new claims before the WHRS. That is principally because the WHRS tends to receive claims regarding dwelling houses, rather than large apartments and, secondly, because the dwelling house has to be built (or alterations giving rise to the claim made to it) within the period of 10 years immediately before

the day on which the claim is brought.³⁷This 10-year period is likely a fiscally-

driven deadline, and says little about the likely volume of remedial work after 2016.

[205] It is also essential to keep in mind that ultimately the question for this Court is not to make a finding of fact based on expert evidence as to the size of the market, but to assess the chances of the market being sufficiently large to deliver the benefits contended for by the plaintiff.

[206] In his first report, the expert called for the plaintiff, Mr Leonard, did not attempt to size the market. Rather he proceeded by relying on the advice from Mr Probett as to what annual sales would be achievable in the first six years of business. He said:

11.4 Incodo has advised that it expects to achieve the following number of units at an average of 150m²per unit:

11.7 We have relied on the advice from Incodo that the above annual sales are achievable and are reasonable.

$20,000–$30,000. It was to finance a new company to deliver in situ timber framing preservative treatment, primarily in response to the leaky home crisis. It advised the bank that Incodo were in the process of finalising an agreement with Kop-Coat (“part of a Fortune 500 company that has traded for nearly 100 years”) to cover all of the top half of the North Island.

Currently preservative treatment on site is undertaken by a labourer with a bucket and brush. Results will be patchy, penetration into timber minimal, work slow and there can never be any warranty or indication of compliance with standards.

[210] It went on to say that Incodo could be a market leader in the sector, able to treat to New Zealand Building Code Standards and certify the timber as complying.

[211] Under the heading “Growth Plan”, Mr Probett told the bank “we strongly feel that growth will be rapid”. He said:

Already we have a long list of companies that would be in need of our product and we plan to carry out a strong marketing campaign from the start. We feel it will be an easy sell to make companies within the industry swap over to using our product as the default with its superior protection, guarantees and speed of application. Once we are used by a consultant or remediation company, we cannot foresee any reason why they would revert to using an inferior product and would continue to provide us with ongoing work as jobs come in.

In addition Councils involved with remediation work where cladding is removed from buildings with untreated timber are becoming more self- protective and insisting that external wall framing is shown to meet code before work is allowed to proceed. For some owners this has meant having to consider replacing all exterior wall framing. Obviously in suit treatment allowing frames to be kept is preferred .

[212] I read those remarks as confident statements by a person who knows the industry. I note particularly, that he is targeting remediation work where cladding is removed, but where the Tru-Core product will enable treatment without frames having to be removed.

[213] The other factor that I note is that Mr Probett is a businessman having to raise only a moderate amount of finance from the bank to get into this venture. There was no incentive to exaggerate the market.

[214] In the same document under “Market Research”, Part 6, Mr Probett says:

Investigations into the leaky building syndrome have revealed the estimated extent of repairs to be between NZD$11-22 billion for residential buildings, NZD$1 billion + for schools and an unqualified sum for commercial buildings that would likely be very high also. Remediation is big business in NZ. Many of the buildings are made of untreated framing and thus require preservative treatments during remediation.

[215] It is important to keep in mind Mr Probett’s qualifications and normal occupation set out earlier in this judgment. There is no history of reckless investment in his past nor was there a challenge to his curriculum vitae in cross-examination.

[216] In Mr Probett’s discussion on market size he draws a distinction between current WHRS claims and properties now out of time to make WHRS claims. He says:

...[Auckland, Tauranga and Hamilton] contains between 80-90% of current WHRS claims. These are the proverbial tip of the iceberg as most properties are now out of time to make WHRS claims, commercial claims are not included and neither are schools.

Increasingly owners are realizing they need to repair homes as evidenced by the large number of properties for instance in downtown Mount Maunganui wrapped in white plastic.

[217] What Mr Probett is identifying is that there are a large number of properties, domestic dwellings, commercial buildings and schools, which are not part of the current WHRS claims and never will be, but are in need of remediation. He is not confining the future business just to domestic dwellings.

[218] Other aspects of his plans submitted to the bank show that he is not naïve. He included an analysis of a competitor’s product, “Metalex”, noting three strengths: that it was already established in the market, had big company backing (Holdfast) and had wide distribution, available directly to the public.

[219] Similarly he identified Framesaver with its strengths, but also with its weaknesses. In Mr Probett’s evidence, common weaknesses of both Framesaver and Metalex preservative are the need for the product to be painted onto the wood.

[220] Mr Leonard relied upon Mr Probett’s assessment. I conclude that Mr Leonard was acting reasonably as an independent expert in relying on the advice from Mr Probett as to what annual sales would have been achievable, in the absence of any other reliable data.

[221] For the purpose of assessing the potential size of the market, I prefer the evidence of Mr Leonard in reply to the evidence of Mr Wattie, where Mr Leonard is critical of the reliance on the 2009 PwC report in forecasting the number of units in the market for remedy in the future. Having referred to the 10-year time limit, he goes on:

...Many buildings are not covered by the WHRS as now being out of time. Leaky homes are being discovered when the present owners, often not the original owners, attempt to sell their homes and the building inspection by a prospective purchaser highlights the building has water ingress damage.

If 90% of the multi-unit claims are not settled by the WHRS together with some 50 per cent of the stand alone dwellings, the data from WHRS greatly understates the number of buildings that will require remediation.

Nor does the WHRS cover non-residential buildings such as schools and commercial buildings.

[224] Reinforcing Mr Leonard, in the course of the trial I drew counsels’ attention to the current litigation being brought by the Ministry of Education against James Hardie for over 900 blocks of classrooms clad in “Shadowclad” requiring

remediation or reconstruction.³⁸This is one example of the size of the market beyond that indicated by WHRS data.

[225] The Court received evidence that typically in remediation work on a leaky building some of the timber framing must be replaced, but some can be saved, albeit requiring remediation in situ by the application of a Boron-based product.

[226] As noted, Framesaver and Metalex have to be applied by paint brush. The Tru-Core product can be sprayed on or painted on. Having heard the evidence, I am persuaded that one of the significant cost and convenience advantages of the Tru- Core product is the speed at which it can be applied. Kop-Coat Inc marketed Tru- Core to Mr Probett on that footing and yet used experts to argue to the contrary at the trial.

[227] Mr Wattie’s opinion on the size of market share, drawing on the PwC report of 2009 and on the prediction of a mature and declining market, were prepared before The New Zealand Herald published, on 17 July 2017, a one-page article “Leaky unit owners left to face ruin”, authored by Mr Paul Lochore.³⁹

[228] On 28 July I issued a minute drawing counsel’s attention to that article and invited counsel to confer as to the relevance or not of any further evidence or submission. I had a telephone conference with counsel on 3 August. Mr Olney for the first and second defendants said there was already evidence before the Court that

30 per cent of apartment buildings on the North Shore are leaking and evidence too of the impact on the Council on recladding entire buildings. He submitted that Mr Wattie and the PwC report had taken into account North Shore apartment buildings. I advised counsel that the article tended to confirm a view I had expressed to counsel during the trial and in closing submissions that the size of the market, particularly

³⁸_{See, for example, Minister of Education v James Hardie
New Zealand [2014] NZHC 2432 at [1].}

³⁹Paul Lochore “Leaky unit owners left to face ruin” The New Zealand Herald (New Zealand, 17

[229] In the course of exchanges at a further hearing on 9 August, counsel for the defendants sought to draw a distinction between the fact that they had adduced evidence from Mr Wattie as to the size of the relevant market but Incodo did not put forward an alternative assessment.

[230] On 15 September, I invited further submissions from counsel, leading to a hearing on 18 September. The issue was whether I could take judicial notice of the discussion in the media, particularly in The New Zealand Herald, plus an editorial following that and a Radio New Zealand programme on the subject on 18 September. The proposition I put to counsel was:

Where it is economically efficient to remediate a building, rather than demolish it, economics will drive remediation, but independently of whether there has been litigation associated with fault or not fault in damages claims.

The question of the fate of owners who cannot afford to remediate either because they are out of time for a claim or otherwise have limited resources will not ultimately determine whether or not the building they are occupying will be remediated if they have to sell.

[2] I am taking judicial notice of the fact that where it is economically efficient to remediate a building, rather than demolish it, economics will drive remediation, but independently of whether or not there has been litigation associated with fault or not fault in damages claims.

Incodo would not have a monopoly market share. There is at least one other timber treatment product established in the market and being actively used in remediation processes to treat timber in situ.

There are also commercial matters regarding uptake of the new product. The Kop-Coat product is claimed to be superior and is quicker to apply than existing products. However, contractors/builders carrying out remediation will be motivated to use product that will generate the best return for them. Kop-Coat would need to compete on net returns and terms with other products. Product quality and application benefits might be influential but it is unlikely they will be decisive.

Also, Incodo would have been entering a mature and declining market. This would add to the challenges of persuading contractors to change from products that have most likely been used for some time. Furthermore, the

suppliers of the competing product would not stand back and let Incodo enter the market unchallenged.

Given these factors but without allowing for any other particular constraints (eg Incodo’s access to capital), it would be reasonable to assume for the purpose of forecasting that Incodo’s market penetration would not exceed a pro rata share i.e. if there are two products in the market then Incodo’s market share would not exceed a 50% of the Auckland market. However, given that Incodo would have been late in entering a mature and declining market, its market share could be significantly less, particularly in the early years of business.

[233] I agree that in these four paragraphs Mr Wattie has identified the challenges that a new entrant would face in this market. The four paragraphs are a priori reasoning applicable to any entrant entering any market, except for the repeated comments that Incodo would be entering a “mature and declining market”. To a degree, that is a possibility. But at present, as discussed, there are still large numbers of dwellings, including apartments, which are being remediated, and likely many dwellings whose cladding may be covering damaged framing. The market size is uncertain. And “a mature and declining market” was not the basis for Kop-Coat proposing to go into business with the plaintiff.

[234] I have already rejected the logic of identifying a mature and declining market by using as a proxy the decline in filings in the WHRS service post the expiry of the statutory 10-year deadline.

September emphasised that the 2009 PwC report acknowledges that the use of WHRS data alone would constitute a significant under-estimate of the number of weathertightness failures. He submitted that the PwC report took into account dwellings, including multi-unit buildings.

PwC report and converted the nationwide figure to an Auckland-wide figure. He also converted the multi-unit buildings, apartments, to the number of properties or dwellings.

[237] In Mr Wattie’s report under the heading “Evidence base”, under the subheading “Weathertight Homes Resolution Service”, he says:

• There has been a gradual decline in the number of open claims. This trend is expected to continue and may accelerate. The end of the financial assistance package scheme and the passing of the 10 year limitation period for claims to the WHRS mean it is reasonable to assume that the number of new claims and perhaps the number and extent of remediations will start to tail off rapidly.

• Our 2009 report estimated that 280 weathertightness affected buildings will be repaired per annum equating to an estimated 920 properties within Auckland per annum.

• Even without allowing for any other business constraints it is unlikely that Incodo could exceed a 50 per cent share of weathertightness remediation work within the Auckland market at best.

This evidence suggests that Incodo sales forecast are inconsistent with the available market for timber treatment for weathertightness remediation. The evidence suggests the entire available market could be less, probably considerably less, than the volume to sales Incodo had forecast it will achieve.

[240] As I read these extracts from Mr Wattie’s report he is sizing the market based on the number of owners of leaky properties who will pursue repair and puts to one side a large percentage of leaky home owners who are not pursuing repair for one reason or other.

[241] Mr Lochore’s argument in The New Zealand Herald points out that there are a large number of owners of leaky buildings, be they dwellings or apartments in

apartment blocks, who are not pursuing repair, nor bringing claims because they either cannot afford to and/or are out of time. But, for the reasons explained above, it is wrong to assume that the market for repair will be by owner occupiers of dwellings or apartments. Rather, where owners, be they of dwellings or unit holders in apartments, are out of time or cannot afford to repair, yet the building is reparable, the building will be sold at a discount to the market, enabling the buyer to expend money on remediation at a price conducive to that investment being recoverable on sale.

[242] I gained the impression when listening to Mr Wattie’s evidence at the trial that he was reducing the size of the market because of this kind of reasoning and, secondly, by confining the market to Auckland. Of course, the 22 May contract did apply to the Auckland market and, for example, did not include Hamilton. But, for reasons I have tried to explain in my judgment, it is my assessment that the defendant Kop-Coat Inc, who instructed its subsidiary Kop-Coat NZ to pursue opportunities in this market would not confine its first choice of contractor, Incodo, to the Auckland market, should Incodo need access to say the Hamilton market, or to smaller urban areas north of Auckland.

[243] Further on the issue of market share, I am not persuaded by the proposition that Kop-Coat’s product quality and application benefits might be influential but it is unlikely they would be “decisive”. If product quality and application efficiencies are superior, and the net cost of application is lower than rivals, it is likely that, over time and sale by sale, superiority of quality and lower costs will be decisive in the choice of product. This is standard reasoning as to the consequences of the presence of a workable competitive market.

[244] I also keep in mind that this Court is examining the potential market entry of a product produced by Kop-Coat Inc, the subsidiary of a Fortune 500 company. The market place will not perceive it as just some new product produced by some small, unknown start up.

[245] I am therefore not persuaded by Mr Wattie’s opinion that it follows that, for the purpose of forecasting, Incodo’s chances of market penetration could not exceed

a pro rata share exceeding 50 per cent of the Auckland market. Again, I note, from the point of view of the buyers of the product, they are not buying a start up’s product. They are buying a quality Kop-Coat Inc product. There was no evidence that Framesaver has an equivalent pedigree.

[246] For these reasons I was sceptical from the outset of Mr Wattie’s opinion that Incodo could never make money, principally because of entering a “small declining market”. This was a conclusion directly the opposite of his clients’ estimate at the time of its pursuit of and contract with Incodo. There has been no change in the PwC data since then. Rather, it predated the licence. Secondly, and more importantly, it is not answering the question: what are the chances of the licensee obtaining market share and being profitable?

[247] The experts have come to completely inconsistent views as to the overall size of the market. We are not talking about differences by degrees. I have criticised the reliance on the PwC data. That data is historical. It tells the Court nothing about the potential volume of dwellings discovered to leak after the limitation period, and nothing about the demand for remediating timber in or on apartments, schools, offices — indeed any large buildings who face at the least re-cladding.

[248] I respectfully think that the experts were in error of law, looking to forecast the accounts of the licensee’s business after entry, rather than estimating the chances of trading profitably in a broad-brush fashion. Remedy for loss of a chance is inherently judgmental.

[249] I turn then to the assessment of the chances of Incodo’s lost business opportunity. I start by comparing the conclusions of the competing experts. As the reader will identify immediately, none of the experts are asking the question “what are the chances of Incodo obtaining market share?” Rather, they are drawing conclusions on the “probabilities”, which are impossible to define.

2.1 Based on the data provided and the assumptions that we have relied on, it is our assessment that the present value of Incodo’s lost business opportunity is $5,140,000.

2.2 Should the gross profit margin be increased in year three to $2.50 per square metre, the present value of the lost opportunity would increase by $1.5m.

2.3 This amount is calculated as an after tax amount and exclusive of GST. GST is not payable unless settlement is received from the insurers for Kop-Coat.

2.4 If the claim for loss of future profits is not sustainable, Incodo should be able to recover costs incurred in setting up the infrastructure for the business.

[251] Mr Wattie did two break-even analyses, unlike Mr Leonard, who did one. Mr Leonard assumed a period of six years of operations; in other words, that the initial contract would be renewed for a further three years. Mr Wattie did not assume that. He did a break-even analysis assuming the contract were to expire at the end of three years and then a second analysis for a six-year period.

The break even analysis suggests that in order for Incodo to generate a positive return on investment it would have to service more than 2,840 units over a three year period or 5,700 units over a six year period of operation. In both cases this equates to an average of approximately 950 sales per annum over the operative period.

That level of sales exceeds the 920 properties we estimate will be repaired in Auckland per annum until 2020. As such, the extent to which Incodo could generate a positive return by operating is questionable. In fact, the analysis concludes it is more likely than not that Incodo would have made a loss.

[253] Mr Leonard’s reply in summary under the heading “Breakeven Analysis” is

55. Mr Wattie has not provided any details on how he has assessed the NPV break-even. I am not convinced it adds to the assessment of the losses. If the contract was for three years then it is probable that Incodo would not have purchased four additional spray units in the final year and the present value assessment should take into account the sale of realisable fixed assets. It is of little relevance when the break-even occurred.

56. In his summary Mr Wattie considers the average sales to achieve a break-even net present value is 950 sales per annum. As I read Mr Wattie’s assessment of the br3eak-even and his conclusion that if

950 unit sales per annum were made that the NPV would be nil at the end of the three year period and at the end of the six year period.

57. I would disagree with this conclusion on the basis that if Incodo were to do only 950 units per annum, the infrastructure needed would be considerably less. Incodo for example would have required only three/four spray units, would require less rental space, and would not have the same overhead and management structure.

75. Mr Wattie has opined that the lack of any right to an extension means there is no certainty that an extension would occur.

76. Clause 3.2 envisages that the parties would endeavour to agree to extend the term a further three years on the same terms as the initial agreement, but for necessary changes to the minimum performance thresholds, or enter a new contract.

77. I consider that the extension is more likely than not to occur and the risk of it not occurring is reasonably included in the discount rate applied.

78. I disagree with Mr Wattie’s assessment that the net present value at the end of the three year term would be $1.510m. That assumes that Incodo would have acted as if the contract were to be extended. It includes the expenditure of $200,000 in year two and $200,000 in year three. Without some assurances that the contract would be extended, Incodo would not have committed to that expenditure. Nor does that allow for the realisation of motor vehicles and plant and equipment that could be sold.

[255] As seen, the two experts differ on whether or not an assessment of damages should include the potential six-year term or be confined to the three-year initial term. The preference of Mr Wattie for the three-year term appears to be based on the grammar of the licence documents that the second three years is not promised: it is

just an option. So it is. But that says nothing about the chances of renewal. A licensee arrangement like this between the company, which holds the patent and manufactures the product, licensing a firm to apply it, has characteristics of selection and co-operation imbedded in it. If the licensee is successful in the first three years it is inherently inefficient for the licensor not to renew the term, but rather go looking for a replacement licensee. When considering the chances of this happening, I also factor in the evidence of Mr James, discussed much earlier in this judgment, where he explains how he searched and looked for the ideal licensee. There was no cross- examination to challenge the expertise and market know-how of Mr Probett. There is no doubt about his enthusiasm for the project and his confidence that he would make money from it. If the licensee performs well, that performance is likely to strengthen the relationship and generate a better than even chance of a renewal of the term.

[256] Before a corporation the size of Kop-Coat Inc decides to enter the market one would not expect it to go to forensic accountants who personally have no familiarity with either their product or the target market, but rather who rely on other studies prepared for different purposes. As reasoned above, in my judgment it was an error to size the potential market significantly on WHRS data, and to conclude that the market was small and declining.

[257] This is not a probability analysis. Rather, it is an “estimate as to what are the chances of profitability”.⁴⁰To reiterate what Somers J said in Takaro, the issue is about “the estimation of the quality of the chance, whether it was an even chance or better or worse than even.”⁴¹

[258] My assessment of Messrs Probett and Scott, is that they are competent businessmen. Mr Ward acknowledged that Mr Scott, an executive employed in the company for 18 years was normally competent. Mr Ward’s evidence was that he was

[260] To be sure the size of the market was uncertain. That part of the market dependent on government financial assistance, and on being within the 10 years limitation was rapidly declining. But there is a significant group of properties owned by persons who cannot go to Court for relief, which properties will be repaired if that is economical, albeit to the loss of current owners.

[261] The market will identify and remediate an indeterminate but sizeable ongoing demand for treatment of salvageable framing in residential dwellings, and in apartment complexes being re-clad, due to water ingress.

(a) Loss of a chance pursuant to the contract of $7,470,000 net, exclusive of GST, made up of:

(4) Tax that would be payable of $10,153,612; (5) Capital expenditure of $1,000,000; and

[263] Mr Leonard in his first opinion supported a lesser figure. In his first opinion he assessed present value of the net future cash flow as $5,140,000, calculated after tax. This was about $2 million less than pleaded. In his brief of evidence and reply to the evidence of Mr Wattie on 9 May, he assessed a present value at lower sales (over six years) but consistent with the ultimate limit of $5,000,000 per annum in Mr

James’ budget forecast prepared before the contract with Incodo (although the sales estimated by Mr James was considerably lower in the earlier years). This resulted in a net present value after tax of $3,470,000. That is also using a discount rate of 28.8 per cent.

[264] I have taken into account that Mr Leonard’s lower estimates were made after he had the benefit of hearing the evidence of Mr Wattie and Mr Bailey and being tested in cross-examination. What impressed me about Mr Leonard’s evidence is that in the course of the trial he moved significantly in his estimates reacting to the criticisms and points made of his original report. Mr Leonard filed a reply to Mr Wattie’s opinion. Mr Leonard says:

If 90 per cent of the multi-unit claims are not settled by the WHRS together with some 50 per cent of standard owned dwellings the data from the WHRS greatly understates the number of buildings that will require remediation.

Nor does the WHRS cover non residential buildings such as schools and commercial buildings.

[266] It was in the course of that reply that Mr Leonard came to the view, assuming a six-year term, that the net present value of the business is $3,470,000.

[267] Ultimately it is my task to assess the plaintiff’s chances of success. First, it is my assessment that there was a risk of business failure in entering the market due to the market not being large enough. However, it is also my assessment that there is a better than even chance of successfully entering and surviving in the market for the first three years and that it was better than even that there would be a roll over to a six-year contract.

[268] Mr Leonard has produced two alternatives, $5,140,000 and $3,470,000 as set out above. Without him expressing it, I read his evidence as indicating that they are rational views open to me.

[269] I am of the view that it is irrational for me to go below the lower of these two. I remind myself that the authorities make it clear that this is an assessment of

possibilities, not probabilities. Embedded in that common law policy is the ethic that where a party repudiates a contract the risks of repudiation fall on the defaulting party. So the party cannot be heard to say there was no loss.

[270] On that basis, I assess the chance at 60 per cent, representing a “better than even” chance. I adopt Mr Leonard’s figure of $3,470,000 as the proper value of the outcome lost. Applying the 60 per cent chance of success to that figure, I find that the plaintiff lost $2,082,000 due to the defendants’ repudiation of the 22 May contract.

[271] Judgment is entered for the plaintiffs against both defendants for $2,082,000. Interest runs on that sum under the Judicature Act 1908 from the date of this judgment.

[272] The plaintiff is entitled to costs. Costs are reserved. The cost issues will be referred to another Judge.

Year 1	500
Year 2	1,850
Year 3	3,050
Year 4	3,800
Year 5	4,000
Year 6	4,000

High Court of New Zealand Decisions

Incodo Limited v Kop-Coat New Zealand Limited [2017] NZHC 2737 (8 November 2017)